Say's Law of Humbug

Demand for that which cannot be done brings forth supply of charlatans. Baum knew it:

Oz, left to himself, smiled to think of his success in giving the Scarecrow and the Tin Woodman and the Lion exactly what they thought they wanted. "How can I help being a humbug," he said, "when all these people make me do things that everybody knows can't be done?

The Munchkins had a latent demand for humbug satisfied by the entrepreneurial Oz.

Chris Dillow points out a nice modern example: demand for expert forecasts. Subjects in Powdthavee and Riyanto's experiment were run through "The System" - a classic scam where you send a random set of stock market or horse betting predictions, toss from the set anyone to whom you sent the wrong prediction, do it again, then offer to continue sending predictions (for pay) to folks who received a few lucky hits in a row. What happened in the lab? Says Dillow:

And here's the thing. Subjects who saw just two correct predictions were 15 percentage points more likely to buy a prediction for the third toss than subjects who got a right and wrong prediction in the earlier rounds. Subjects who saw four successive correct tips were 28 percentage points more likely to buy the prediction for the fifth round.

This tells us that even intelligent and numerate people are quick to misperceive randomness and to pay for an expertise that doesn't exist; the subjects included students of sciences, engineering and accounting. The authors say:   

Observations of a short streak of successful predictions of a truly random event are sufficient to generate a significant belief in the hot hand.

It's easy to believe that this happens in real life. For example, the people who are thought to have predicted the financial crisis of 2008 are invested with an expertise which they might not really have.

The paper's excellent title? "Why do people pay for useless advice?"

I wonder whether basic training at high school in financial literacy and classic scams might do any good. But it's hard to overcome the demand for humbug. And the paper finds that student subjects with more correct answers in a statistical test didn't spend less on predictions. If these were the results for college students, how awful would a general sample look?