by Edward Chancellor
Alexander Ineichen, a Swiss financial analyst, has published a collection of epigrams and aphorism which together constitute what he calls Applied Wisdom: 700 Witticisms to Save Your Ass(ets). This book is intended for investors, but trying to understand the course of the pandemic presents similar challenges to mastering the financial markets – in both cases, there is a great deal of uncertainty, faulty modelling and forecasting, vested interests and a prevailing crowd psychology to contend with. Successful investors are nature’s contrarians and nonfinancial sceptics can learn much from Ineichen’s collected witticisms.
The Problem of Forecasting
The modern epidemiologist, equipped with complex mathematical models, has much in common with the contemporary economist. Both economists and epidemiologists attempt to forecast an immensely complex system, namely human society, equipped with models and data inputs that are not up to the task. Both face institutional pressures and incentives that produce a conformity of outlook. And when their forecasts turn out to be inaccurate, they suffer no ill consequences. As a result, they often fail to learn from their mistakes.
Ineichen says that markets are governed by Gump’s Law, (derived from a line in the movie Forrest Gump), which states that life is a box of chocolates because you don’t know what you’re going to get. When you next encounter someone who confidently predicts the course of the pandemic, some of the following responses might be apposite:
“Forecasting is not a respectable human activity, and not worthwhile beyond the shortest of periods.” – Peter Drucker
“The herd instinct among forecasters makes sheep look like independent thinkers.” – Edgar Fielder
“Anyone who causes harm by forecasting should be treated as either a fool or a liar. Some forecasters cause more damage to society than criminals.” – Nassim Nicholas Taleb
“Many of us smile at old-fashioned fortune-tellers. But when the soothsayers work with computer algorithms rather than tarot cards, we take their predictions seriously and are prepared to pay for them.” – Gerd Gigerenzer
Financial markets are moved by greed and fear. Society during pandemics is moved by hope and fear. Fear is the dominant emotion. Both fear and greed encourage a crowd mentality. The sceptic stands aloof from the crowd and tries to think for himself. The first step is to master fear:
“If you can control fear, it makes you more alert, like a deer coming across a lawn.” – Mike Tyson
The crowd is emotional, its nature is unquestioning, irrational and intolerant. Bad ideas spread contagiously:
“Man, like animals, has a natural tendency to imitation… the opinions and beliefs of crowds are specially propagated by contagion, but never by reasoning.” – Gustav Le Bon
“The majority is always in the wrong. Whenever you find yourself on the side of the majority, it is time to reform (or pause and reflect).” – Mark Twain
“When problems are difficult, the wisdom of crowds tends to fail, and small groups make better decisions.” – Mark Buchanan, physicist
“The fact that an opinion is widely held is no evidence whatever that it is not utterly absurd.” – Bertrand Russell.
Distrust of Experts
Sceptics have neither an unquestioning faith nor blind distrust of expert knowledge. However, they are wary:
“A knowledgeable fool is a greater fool than an ignorant fool.” – Moliere
They also distrust complex models:
“Essentially, all models are wrong, but some are useful.” – George Box
“Beware of geeks bearing formulas.” – Warren Buffett
As Ineichen says, experts are adept at finding relationships that aren’t there, something known as ‘illusory correlation’. There’s even a word, dysrationalia, to describe smart people doing dumb things. Ineichen cites one of the rules of market strategist Bob Farrell that “when all experts and forecasts agree, something else is going to happen”.
Learning From Mistakes
The sceptic should constantly test his ideas and adapt to changing circumstances. There’s nothing wrong with being wrong, only with staying wrong:
“Error is the price we pay for progress.” – Alfred North Whitehead
“Human reason can neither predict nor deliberately shape its own future. Its advances consist in finding out where it has been wrong.” – F.A. Hayek
The Illusion of Control
As Ineichen writes, risk management is not a science, otherwise Nobel laureates would be good at it. Sceptics tend to reject centralised attempts to manage risk, believing that they’re likely to do more harm than good:
“No matter how much information we gather, no matter how carefully we analyse it, a strategy of predict, plan and control will in general fail.” – Paul Ormerod
Furthermore, as the economist Thomas Sowell says, government actions which produce benefits at first sight often have less positive “ripple effects” that are unobserved.
Sceptics find themselves examining, and often trying to refute, a bewildering number of dubious narratives. Some modern politicians follow the advice of W.C. Fields: “If you can’t dazzle them brilliance, baffle them with bullshit.”
It’s hard work countering their narrative:
“The amount of energy needed to refute bullshit is an order of magnitude bigger than than to produce it.” – Alberto Brandolini
At times, the sceptic’s task seems hopeless:
“If we’ve been bamboozled long enough we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It’s simply too painful to acknowledge, even to ourselves, that we’ve been taken. Once you give a charlatan power over you, you almost never get it back.” – Carl Sagan
Scepticism may be unpopular with the crowd but it’s a force for public good.
“Those who can make you believe absurdities, can make you commit atrocities.” – Voltaire
“Without freedom of thought, there can be no such thing as wisdom, and no such thing as public liberty.” – John Trenchard and Thomas Gordon
“It is not disbelief that is dangerous to our society: it is belief.” – George Bernard Shaw
“The greatest challenge facing mankind is the challenge of distinguishing reality from fantasy, truth from propaganda.” – Michael Crichton
Wit and Humour
Wit, says Ineichen, is a form of wisdom. Sceptics must try to retain their good humour, even at bleak times: “A sense of humour is a sense of proportion.” – Khalil Ghibran
Ridicule and cynicism are tools in the search for truth: “The final test of truth is ridicule. Very few dogmas have ever faced it and survived.” – H.L. Mencken
Most people are overly confident: “Nothing is so firmly believed, as that what we least know.” – Montaigne
Ineichen recommends modesty, citing Socrates: “The only true knowledge is knowing that you know nothing.”
Sceptics should avoid dogmaticism:
“Doubt is the beginning, not the end of wisdom.” – George Iles
But it’s not a good idea to exhaust one’s energy opposing the mob: “You cannot fight the water, you’ve got to learn how to live with it.” – Sailing proverb
Sceptics should never despair: “Pessimism never won any battles.” – Dwight Eisenhower
After all, they have Stein’s Law is on their side: “If something cannot go on forever, it will stop.” – Herb Stein
Remember that “scepticism is the first step towards truth” (Denis Diderot). But only the first step.
Edward Chancellor is a financial journalist.