A lot of people find it very hard to accept the randomness in economic cycles, the stock markets – or in life.
If a share goes down 5%, they have a reason for it. If a share rises 5%, they have a reason for it. Yet if there IS a reason for it, you can be sure they don’t all have the right answer. The sheer multiplicity of their explanations guarantees that.
The snap conclusions that we’re all inclined to make about share prices is a manifestation of The God Complex, a quirk of human psychology that basically says that no matter how complex the situation you’re looking at, you strongly believe your own solution is correct.
Worse, if you’re an expert then you’re even more convinced – when in reality, your superior knowledge should often encourage you to be more circumspect.
It’s well worth taking 18 minutes of your time to watch the following presentation from TED by Tim Harford, the author of The Undercover Economist
No doubt the God complex equipped us well for life on the plains of Africa, when we had to move quickly and with confidence to avoid being a snack for a passing lion. But it doesn’t help us to evaluate a share for potential investment, or to solve other complex investing issues.
I can barely remember a time when those prepared to speak out about complex economic problems like the debt crisis in the US and Europe spoke in such simplistic, misleading and vehement terms, nor when in contrast those who feared that very complexity were so reluctant to make a move in the market.
For example, I seem to be alone in thinking that European politicians are doing exactly the right think with Greece. They are edging towards a solution via trial and error, seeing how much time a bit of fiddling at the fringes can buy – time for the infinitely more capable market to move towards a solution.
I’m more than happy to keep investing in the face of such fear. The opinion among most media and finance bloggers, in contrast, is that the system will explode unless there’s some ‘grand solution’ that will somehow solve all Europe’s problems for the next 20 years out at a stroke.
In response, I’ll quote a poet:
“The best lack all conviction, while the worst are full of passionate intensity.”
– William Butler Yeats, The Second Coming
Further reading
- You probably can’t pick stocks better than the market, so buy a tracker.
- Read Fooled by Randomness
by The Black Swan
author Nassim Taleb.
- Tim Harford’s new book Adapt
is about how success begins with failure.
Interesting angle on the Greek scenario. Hadn’t thought of it that way. You may well be right, though it’s difficult to use. As the man said, it is hard to make good mistakes 😉
The main thing to do is not to fear the macro, in my view. It’s overvaluation, consensus and euphoria that kills investment returns, not fear and depressed prices. The macro picture would send you into US government bonds right now, or maybe the Swiss franc, which both resemble a ballerina en point on a knitting needle. I’d far rather buy still largely shunned UK stocks for the long haul.
But you knew that. 😉
1. Too much, as you say, ill-informed noise out ‘there’. As ever.
2. But I’m only responsible for some of it.
I think I take the same view. There are no simple solutions to the Euro crisis and a hill-climbing approach to solving it is both politically mandatory and economically probably no worse than most. I don’t think we have had the last “crisis”, though.
I am continuing to invest on dips, but as slowly as I can.
The term ‘God Complex’, in my experience, is assigned to someone who has messed up in some way. (like the doctors mentioned in the video clip).
For some situations we would much rather deal with people who do sincerely believe their solution is correct. For instance, even though I know that my doctor’s knowledge must be finite, I still want her to be convinced she knows what is wrong with me when I go to see her. I don’t want her to tell me she will find out by trial and error.
If my doctor cures me she is a heroine. If she messes up, she had a God Complex.
There are many documented ways of problem solving, some solution methods fit some problems better than other methods.
‘Trial and error’ really means ‘I don’t know but lets have a good crack’. Many things have been discovered by trial and error and I am not knocking it.
I do believe it has some drawbacks though: firstly, it is very time consuming to do and secondly, you can be sure you have a solution but not necessarily the best one. For instance, in the case of the video, the nozzle for the detergent dispenser was straight. Why not a curved nozzle or a nozzle made of a different material?
From a human point of view, we as a society are moving at a much faster pace than before and we want solutions NOW.
It is OK for people to believe in their convictions as long as they are correct.
Correctness makes people heros, prophets and visionaries.
Incorrectness bestows ‘God Complex’, nutters and zeroes.
How to tell the difference? trial and error, with the prizes and punishments it brings.
@GMO — Yes, in investing terms it’s often called ‘survivorship bias’. It’s all very well if you’re stumbling towards a solution, but not so good if you’re one of the ones who gets trodden on, eh? I’ve always been a bit suspect of appeals to the efficacy of evolution for this reason… it took billions of years to get to the human beings, but only tens of thousands for us to go from the wheel to the iPhone.
That said, I more agree with him then don’t, I think. Your point about doctors is interesting, though – there’s definitely a placebo reaction or similar I think in a lot of medicine. A doctor saying ‘maybe’ isn’t half so healing…
@ Mr Monevator
I had to look up ‘survivorship bias’ and am glad I did because it’s a very intersting concept.
Totally agree about the placebo effect. Have you noticed how many people go to fortune tellers when times are bad compared to when everything is swimming along nicely? People need hope.
That said, trial and error has been a godsend to certain companies. Technology springs to mind. Imagine how many sales would have been missed out on if, say, Playstation wasn’t sent to market until it’d reached its current evolution. Likewise anything with the word ‘generation’ in it eg 3g mobiles.
I’m not particularly technical and I don’t really know what else I would want or need from technology at the moment. Eleven years ago, I didn’t have a mobile phone and wasn’t even aware I needed one. Today, I wouldn’t be without my mobile. When I got my first mobile 10 years ago, I thought it was the bees knees. In retrospect, it was a brick with minimal functionality – I do remember having to type in each number when I wanted to send a text because I couldn’t select a number from the address book!
I eagerly await for the technology companies to come up with something else I will need that I wouldn’t be able to think of now.
It’s evolution and trial and error in its full glory. The things I’m not sure of is who the technology is evolving for and what the end point is.
Growing My Own