One of the great benefits of living in a free society is that people can have legitimate differences of opinion about the meaning of information and best courses of action. In this space and, more recently, on social media, I have taken to pointing out the small army of credible sources who concur with my viewpoint that markets are frothy and likely headed for a significant tumble. Not surprisingly, there are plenty of folks who think things look rosy and that there are no significant storm clouds on the horizon at all. Obviously, we can’t both be right.
What I find interesting is that I have critics who allege that I am guilty of confirmation bias, a behavioural economics term that suggests people only seek out evidence that supports their pre-existing viewpoint. While I certainly acknowledge that that might be possible, I find it interesting that the people making the accusation don’t recognize that the same allegation could be levied against them just as easily. Both sides of the ongoing debate about what might be in store on the capital markets horizon could be accused of looking primarily, perhaps even exclusively, at information that supports their preferred narrative. How exactly does one prove that one’s thinking has been fulsome and comprehensive?
Professor Robert Shiller’s latest book, Narrative Economics, explains the problem eloquently and uses dozens of examples. In economics, superior stories often take hold and become widely accepted – not so much through merit or a competition of ideas, but through the press, at coffee shops, and, in the 2020s, on social media. There are multiple possible behavioural economics explanations for the current majority viewpoint that things are likely to be fine for the foreseeable future. They include:
- confirmation bias, which we’ve already touched on
- herding, which is a form of groupthink
- recency bias, which discounts possible events because there hasn’t been a problem recently
- optimism bias, which is a tendency to view the world through rose-coloured glasses
- overconfidence, which Daniel Kahneman suggests might be the most insidious bias of all
Nobody knows what the future holds. What I know is that I am on the side of science and evidence. When bloggers dismiss Shiller’s work based on the preposterous allegation that there’s not enough data to support his thesis that CAPE is a reliable predictor of the next decade’s returns, I worry. When other bloggers suggest that the Miller-Modigliani thesis of rational investor indifference to a company’s dividend policy is bunk, I worry. Shiller, Miller and Modigliani all have Nobel prizes. What do the critics have?
We live in a world of misinformation. It’s bad enough as it is, but when bloggers suggest that the evidence put forward by the most esteemed financial economists of our generation are all a load of hooey, I worry about those who pay attention to those bloggers. It’s dangerous to follow false prophets… and that includes so-called ‘experts’ who purport to know more than Nobel laureates.