Arnold Kling asks why economists think they can improve educational outcomes by firing the worst teachers (a position he labels E) but none of us think that we could improve financial performance by firing the worst financial managers (a proposition he labels F).

He concludes

Both (E) and (F) are false, but economists have much softer priors about (E). That is, economists are strongly inclined to believe that outstanding performance in money management is luck. As a result, when someone claims to find something like (F), you can be sure that a significant effort will be expended on research designed to disprove that finding. On the other hand, economists would, if anything, like to believe (E), so that when someone claims to find something like (E), relatively little effort is expended trying to disprove that finding.

On a basic level the difference , somewhat reflected in Arnolds third option, is that economists believe that we know up front who the best or worst teachers are going to be over the next five years. Its the teachers who were the best or worst over the last five years. That is, economists believe individual teacher quality explains a huge fraction of the variation in student outcomes.

However, economists don’t believe that we can pick the best or worst financial managers over the next five years, just by looking at the best or worst from the preceding five years. That is, economists tend to think luck is the primary determinant of financial returns.

Now, admittedly Warren Buffet is an embarrassing counterexample for the luck hypothesis. On the other hand Merton and Scholes really looked like the smartest guys in the room until Long Term Capital blew-up in everyone’s faces. Moreover, Buffet’s legendary status makes him the exception that confirms the rule.

More deeply, economists argue that the most sensible way to invest is to simply buy a weighted average of all investment vehicles based on your risk tolerance.

Yet, few of us believe that the most sensible education is simply to take a weighted average of all currently used curricula and methods.

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