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Wednesday, 19 May 2010

Money Matters, Your Opinion Doesn't

Blame the French

Our brave new world is filled with a cacophony of opinions; everyone’s an expert. The proliferation of media channels, accompanied by ever more desperate attempts to keep up with social networking and inclusivity trends, is leading to a world governed by the lowest common denominator. Now get this: I want to be informed by people who actually understand what they’re talking about, even while reserving the right to disagree with them, rather than by someone whose main skill is in double-jointed thumbery and text messaging.

Aliens viewing the output of terrestrial media from afar are probably wondering what type of disease is decimating the intelligence of the average Earthling. This babble of uninformed opinions is swamping the already low level of intelligent comment available and nowhere is the problem greater than in finance where people start with the view that possession of a small amount of capital and an internet connection makes them gifted and talented investors. Still, if nothing else, we can probably blame the French.

Post-modern Equivalence

Don’t misunderstand me, I absolutely adore France. Indeed there’s very little to dislike in a country notable for its independent culture, fantastic food and fanatically rude service staff: it’s the only place in the world where your waiter treats you like he’s doing you a favour. It’s a wonderful country but it does have a history of rather odd ideas. Stuff like liberty, regicide and post-modernist philosophy.

Post-modernism is a peculiar branch of philosophy that argues the case for moral relativism or to put it in English, it starts from the point that everyone’s perspective is equally valid. This, of course, is the lynchpin of inclusivity – if everyone’s viewpoint has an equivalent weight then everyone has an equal right to a voice. Underlying this, though, is a proposition that enrages scientists the world over because if all ways of looking at the world are equivalent then science has no special place and, in particular, scientists have no right to a special say in anything.

And the Scientifically Illiterate Shall Inherit the Earth

This idea has gained an awful lot of traction, mainly amongst people who don’t understand science – a group that includes a lot of philosophers, quite a lot of economists, virtually the entire output of university humanities faculties the world over and, not entirely coincidentally, nearly every journalist of every hue imaginable. After all, if post-modernism is correct none of them need to worry about whether anything they opine is actually true or not because, well, “truth” is such an old fashioned concept, innit?

It’s all vaguely funny, of course, but it also leads to some seriously dangerous viewpoints gaining tremendous media coverage. Here in the UK we’ve seen a major mumps outbreak and a year on year rise in measles because of a scare story developed out of some frankly dodgy research on the triple-jab vaccine for mumps, measles and rubella. The research purported to show that the vaccine was implicated in a rise in autism in children and led to widespread boycotts of the jab with predictable consequences – the dangers to children of not having the vaccine were always significantly greater than having it, even if you believed the research.

The list of bodies implicated in this cock-up are long and varied and the scientific establishment doesn’t come out of it especially well either. However, the media misreporting in spite of the best efforts of informed scientists to point out the true issues clearly was, and still is, a major factor. Of course, the views of scientifically illiterate celebrity journalists were regarded as equally valid to that of reputable scientists, although none of these people now seem willing to take any responsibility for the inevitable rise in brain damaged children and worse, preferring to let the hapless academic at the heart of the study take the blame. The wonderful Bad Science blog carries the whole story, blow by blow, here.

Don't Fly in Post-Modern Planes

The point, of course, is that allowing uninformed, ill-educated views the same weight as those of people who actually know what they’re talking about is stupid. At root even post-modernists know this since we rarely find them flying on aircraft designed by people whose main skill is in levitation by channelling lay-line energy through crystals.

Perhaps the best known refutation of post-modernist ideas is Sokal’s Hoax, where the physicist Alan Sokal managed to get a post-modernist journal to print an article in which he essentially claimed that large parts of science are not based on objective reality but are, instead, socially constructed. The article is deliberately riddled with basic scientific mistakes, although the real joke is in the genuine post-modernist thinkers that Sokal quotes to back up his tongue-in-cheek attack, whose grasp of science appears to have been acquired by watching repeats of children's TV without fully understanding the details.

The problem with all of this nonsense is that it spills out into the real-world and the idea that we all have opinions worth giving equal weight to is dangerous to the extent that it obscures the effort and training that goes into acquiring the skill and knowledge needed to run our increasingly complex world. Nowhere more so does this apply than in the world of investment where the proliferation of internet trading and access to increasingly large amounts of financial information is encouraging the creation of a new breed of investor: irrationally over-confident, desperately underperforming and, apparently, completely lacking in self-awareness: see Don't Lose Money In the Stupid Corner.

The Cramer Bounce

However, we shouldn’t be surprised because the popular finance experts don’t do any better after you’ve adjusted for the effect of a pundit making a stock call. The “Cramer Bounce” after the popular and wildly entertaining TV pundit Jim Cramer announces a stock tip is well established. In Market Madness? The Case of Mad Money the researchers show that market professionals are happily making money off of the uninformed. Yet, as the researchers point out, rather plaintively:
“We also find little evidence that Cramer has skill in selecting stocks, so it is unclear why the market responds at all to his recommendations.”
The main finding, which is one that’s been found in other stockmarket media recommendation studies, is that there’s a price surge following the tip followed by a partial reversal. It rather looks like those people who know what they’re doing are making money at the expense of those who don’t. This too is no surprise, the stockmarket is a very efficient mechanism for moving money from the pockets of those who think they know a lot but don’t to those who know they don’t know much.

Reason and Evidence

The point is that having an opinion is to humans concomitant with being able to fog a mirror, it doesn’t signify any special understanding of the topic under discussion. To be valid and/or useful an opinion needs to be underwritten by understandable logic and supported by verifiable evidence. This rules as inadmissible over 99% of most opinions expressed but even then is only a necessary condition. To be sufficient you need to dig into the details which, frankly, most of us don’t have the time to do.

To create a business involves a chain of complex stages including having an idea, developing a business plan, raising finance, investing in assets, employing people, navigating your way through legislation, finding customers and so on and so forth. If this sounds hard, it is. If merely opening an internet trading account and reading a few opinions on-line or in our uninformed media was enough then everyone would do it instead of sweating the hard stuff. The truth is that investing is just as tricky to make money out of, requires just as much effort and is just as likely to end in failure as any other business venture.

That’s why your opinion’s irrelevant, unless you back it up properly and fight the urge to seek confirmation for your pre-formed views as discussed in Confirmation Bias, The Investor's Curse. And, to be frank, if you’re going to put that much effort into identifying good investment ideas why are you going to share them with me? In money matters you get out what you put in. Opinions alone are not enough.

Related Articles: Don't Lose Money In The Stupid Corner, The Media, Fear and Stockmarket Manias, Bulletin Boards Are Bad For Your Wealth


  1. To be sufficient you need to dig into the details which, frankly, most of us don’t have the time to do.

    The other side of the story is that you only need to get the basics right. You can be a perfectly successful investor without spending any time whatsoever learning about sophisticated strategies.

    So every investor should think through the fundamentals for himself, refusing to take the word of any "expert" as gospel. That takes one or two weekends if you do it right. And then you're set.

    You need to learn a few things very, very, very well.


  2. You write some good stuff. Keep it up.

  3. You can't mention Sokal Hoax without mentioning the Bogdanov affair, in which French twins Igor and Grichka Bogdanov published illegitimate papers in reputable scientific journals.