as an officer deployed in a variety of combat situations. The USMC relies on “standard operating procedures,” or SOPs, particularly when Marines are in harm's way. SOPs are developed according to the three-step process mentioned above, which is designed to establish the most robust, effective, and systematic decision-making process possible.
One example is the SOP for setting up a defensive position in a combat situation.7 In the first phase of SOP development, experienced combat veterans and expert consultants review past data and lessons from the field to develop a set of rules that Marines will follow when establishing a defensive position. These rules are debated and agreed upon in an environment that emphasizes slow, deliberate, and critical thought. The current rules, or SOP, for a defensive position is summarized by the acronym SAFE:
• Security
• Automatic weapons on avenues of approach
• Fields of fire
• Entrenchment
During the second phase – the implementation phase – of SAFE, Marines in combat are directed to “follow the model,” or adhere to the SOP. The last thing a Marine should do is disregard SOPs in the middle of a firefight, when the environment is chaotic, Marines are tired, and human decisions are most prone to error. Marines are trained from the beginning to avoid “comfort-based” decisions and to follow standard operating procedures. Of course, once the battle is over, Marines in the field will conduct a debrief and send this information back to the experts, who can debate and assess in a calm environment whether the current SOP needs to be changed based on empirical experience gleaned from the field – the third phase. A key principle of this three-step decision-making process is that discretionary experts are required to develop and assess, but execution is made systematic, so as to minimize human error. The Marines, like other critical decision makers, want experts to develop and assess SOPs in a stable training environment. However, the Marines want to implement SOPs systematically when the environment shifts from the training environment to the live battlefield.
The so-called expert's hypothesis, which asserts that experts can outperform models, is intuitive and tells a deceptively compelling story. For example, to most, it seems like common sense that a hedge fund manager with a Harvard MBA and 20 years of work experience at Goldman Sachs can beat a simple model that buys a basket of low P/E stocks. The logic behind this presumption is persuasive, as the expert would seem to possess a number of advantages over the model. The expert can arguably outperform the simple model for the following reasons:
• Experts have access to qualitative information.
• Experts have more data.
• Experts have intuition and experience.
Of course, there are other ways to support the argument that a human expert will beat a simple model, but most of these stories revolve around the same key points already outlined.
The following three arguments, however, underlie the expert's hypothesis, and while they are plausible, they are wrong:
1. Qualitative information increases forecast accuracy.
2. More information increases forecast accuracy.
3. Experience and intuition enhance forecast accuracy.
Remarkably, the evidence we will present illustrates that qualitative information, more information, and experience/intuition do not lead to more accurate or reliable forecasts, but instead lead to poorer decision-making. And because this result is so counterintuitive, it makes it that much more important to understand.
Among the hundreds of cases of expert forecasts gone awry, one high-profile example is Meredith Whitney.8 Ms. Whitney is famous for her prescient forecast of the banking crisis that reared its ugly head in late 2008. Public accounts of Ms. Whitney's predictions which were widely observed and discussed during that time period, all suggested that Ms. Whitney was a “genius” after her remarkable call on Citibank's balance sheet blues.
But Ms. Whitney didn't stop there. She outlined her gloomy forecast for the municipal bond market on a December 2010 segment of the prime-time CBS news program 60 Minutes. Ms. Whitney predicted there would be “50 to 100 sizable defaults.” She forcefully reiterated her prediction at the Spring 2012 Grant's Interest Rate Observer Conference, where we observed firsthand the emotional conviction Ms. Whitney felt for her bold prediction.
However, Ms. Whitney's powers of prediction were fleeting. In an article published in September 2012, the Wall Street Journal published a stinging article titled “Meredith Whitney Blew a Call – And Then Some.” The piece was quick to point out that that “there were just five defaults” in the municipal market.9
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