How does one react when one's predictions have been falsified. Well, let's get an example from Justin Wolfers trying to explain why the markets did not crash when Donald Trump was elected:
My own view is that last week’s stock market gyrations reflect a more fundamental market failure.
Call it a failure of imagination. Investors simply failed to imagine how they might feel when they woke up to President-elect Trump.
This failure to fully imagine the implications of the new world is not rational, but it’s very human. I know that my thoughts in the days after Mr. Trump’s win are different than those that dominated my election-eve conversations.
Mr. Wolfers' explanation assumes that we know what the markets are communicating and that we, being the educated economists that we are, know the possibilities of a Trump administration better than traders do, hence the invocation of market-failure theory. Reading the tea-leaves that are market sentiments is fraught with danger. It is more the purview of warlocks and witch-doctors, whose rituals offer them perception uninhibited by time and ignorance, than serious economists.
Market agents foresee and adapt. When they fail to foresee and adapt, market agents lose their money and their ideas go extinct. No practicing economist should be invoking market-failure theory to credit himself with greater clairvoyance than the markets. Then again, maybe practicing economists are no better than warlocks and witch-doctors. One may have been better listening to one rather than Mr. Wolfers!
The market process is there to check the errors of market agents. There is no such check on the error of economists, they may read the tea-leaves all they like without reality ever asserting itself.
I think we are better off trusting people with skin in the game than commentators massaging their own egos with incantations of market failure.