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Trend Illusions

by Henry Oliner

The Art of Thinking Clearly by Rolf Dobelli (highly recommended) is a compilation of biases and psychological barriers to clear and rational thinking. Dobelli warns of “trend gurus who see trends in everything”.  He contends this is “one of the most idiotic ways to see the world.”

This is like our tendency to see shapes in clouds and to see patterns in data and numbers. Given our ability to amass vast quantities of data and our desire for order in the universe, this is a seductive pattern. It is unsettling to believe we are pawns in a casino.

The danger in these delusions is that we believe it enables our power to predict.  This “gambler’s fallacy” of seeing order where there is none causes financiers to make bad investments, pundits to make bad predictions, and politicians to enact bad policy.  This delusion causes less damage in business and investment because the damage is usually limited to the fools (often some very credentialed fools) and the mistake is rectified relatively quickly.

One of the reasons that government solutions should be a last resort is because political decisions are as subject to these errors in thinking as private sector decisions, but there are greater blocks to recognizing and correcting the error in judgment. Politics is part rational but also part tribal.

For some experienced yet biased investors, it was inevitable that Trump’s election would result in a market sell off. It didn’t. It resulted in the one of the sharpest market advances after an election in recent history.

When Gavrilo Princip shot Archduke Ferdinand and his wife, Sophie, on June 28, 1914 few would have predicted it would have led to World War One, the inept Armistice and soon after, World War Two and the Cold War.  If Princip had done the same deed a few months before or a few months after we could not be certain it would have had the same results.

The trend fallacy seems to work in hindsight.  Some movements go to extreme and invite countertrends.  After 50 years of expansive progressivism culminating in the stagnation of the 1970’s,  Ronald Reagan won claiming that government is more of the cause than the solution. A similar exhaustion may have provided some wind to Donald Trump’s sails.  But we should not confuse the power to describe with the power to predict.

While a complicated world may be unpredictable, that does not mean that behaviors are irrelevant. Excessive debt makes a family or a corporation or a government vulnerable to unpredictable events.  We may confuse talent and success for a mere regression to the mean, but predicting the timing of these outcomes or how they will become actualized is a fool’s game.

What appears to be a difference in political ideology may be a mere difference in time frame. Long term outcomes may be ignored for the short-term payoff of a vote or a campaign contribution.  We may lament the failure of policy after the first act of the play, only to see it succeed wildly after the third act, if we choose to stay for the entire play.  Patience is not a popular American virtue.

The first step to honesty is clarity. Good decision making is already difficult to achieve. To cloud it further with unnecessarily complicated systems designed to hide and cross subsidize costs is not likely to lead to better outcomes.

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Category: Philosophy, Politics, Progressivism

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