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Monday, 27 March 2017

The Future is Made in the Bedroom, Not the Boardroom

RIP Hans Rosling

Hans Rosling was, if you’re a data geek like me, a hero. His life was spent not just combating fake facts and opinion based decision making but also in finding new and imaginative ways of visualising real data. And he was in demand by corporations across the world because his work showed them where to invest.

So obviously Rosling wasn’t an economist: he was a population statistician who built his ideas on data, rather than models. And what his data suggests is that the future is made in the bedroom, not the boardroom.


Unlike many people in his profession Rosling was an optimist who believed our problems could be solved without a descent into some kind of dysfunctional dystopia. Not everyone agrees with him – Anne and Paul Ehrlich took particular issue with his presentation of data in A Confused Statistician:

Rosling’s soothing assurances are analogous to a physician telling her lung cancer patient, not to worry, don’t get treatment. There’s lots of good news: your teeth have no cavities, your vision is excellent, and I see no symptoms of flu.

Whether or not you think Rosling was suffering from Pollyannaism, he and his son Ola have been performing an unmitigated good in attempting to raise awareness of the underlying biases that limit our capacity for analysing these types of arguments in the face of the deluge of facts, fake and otherwise that we face each day. As heuristics these aren’t bad rules of thumb for an investor. Go look at the TED Talk they gave on the topic:

Bias and Heuristics

They start by identifing three sources of bias that impact our reasoning: personal bias, outdated facts and news bias. Personal bias we’ve met many times before (see, for example, Experience, Rare Events and Risky Choice) – it’s the problem of extrapolating from our own limited, personal experience of the world into more general rules. Our own experiences are not necessarily typical of the general trend, but our brains are wired to value them over any amount of verifiable statistics.

Secondly, having been biased by our experiences we’re then subjected to fake facts – or at least outdated ones – by education. Textbooks are out of date and teachers are educating based on what they were taught, which was also out of date, and was also based on outdated information. So we heap inaccurate information on top of a skewed set of experiences.

And then we’re bombarded by news which even when not overtly fake is always biased towards the newsworthy and away from the norm (c.f. The Media, Fear and Stockmarket Manias). Announcing that knife crime has risen by 300% is much more newsworthy than stating that there were 3 stabbings this year compared to 1 last year.

To deal with this Hans and Ola suggest that we bear in mind four rules of thumb – heuristics – which we should apply to debias the information we’re presented with.

#1: Most things improve

In the absence of hard data or certainty then the default position should be to assume things are getting better. My father continually laments the lost land of his youth before relating tales of people dying of septicaemia and relatives lapsing into waking comas because of hypothyroidism in a time before universal healthcare in the UK.

We can all find examples of investments that were a disaster but a chart of stockmarket growth over any twenty year period will show a positive outcome for an unbiased investor. Sadly most investors, especially inexperienced ones, chase blue sky growth opportunities like kittens chasing torchlight.

#2: Most people are in the middle of a distribution

We tend to polarize to extremes, but the truth is more prosaic. Most of us are average at most things, even if we think we’re not. As we saw in Where Two Strangers Never Meet most people – and especially most men – thing they’re above average drivers. Well, clearly that’s not possible.

The same is true in investment. Most of us are average investors, even though we think we’re not. Most stocks are average performers, but an average stock performance should still beat most investing classes.  Mostly we should invest in index trackers or diversify widely to avoid our average natures accidentally capturing too many worse than average stocks. An investor that under-diversifies is assuming that they’re at the top end of the distribution, a really great driver. Well, you might be: but you're probably not.

#3: Social development comes before wealth

People don’t have to be rich to be clever, or healthy. We should look to invest where population growth is slowing because that’s where excessive economic growth will happen next. We’ll return to this in a minute.

#4: Sharks kill few people – we exaggerate the risk of things we’re personally scared of

Ola Rosling gives the example of sharks not being dangerous. Of course, sharks are dangerous, but the actual risk of one chowing on you is very small. But we’re scared of sharks so we exaggerate the threat.

The world is investment is full of sharks, often played up by news channels who know that nothing sells like a good scare story. But investors should try to operate on a fact driven basis, not an emotional one.  You’re more likely to die driving than in a plane crash, no matter how much news coverage is given to a plane going down. Or how good a driver you think you are.

Population Orthodoxy

What we, as investors, would like to do is invest in a way that biases the odds in our favour. If we’re average – as we probably are – and inclined to be swayed by stories that have especial significance for us then we’re better off relying on the fact that most things improve over time and using index trackers or broad diversification. But Rosling’s work on population growth was of interest to multi-national corporations because it suggested an opportunity to beat those odds.

The orthodox view of population growth and wealth is that countries have to become wealthy before population growth declines – basically people in poor countries are likely to see some of their children die and so have larger families to compensate. Rosling argued that this isn’t necessarily so, pointing to South East Asia where family sizes declined before economic growth soared.

Over the last 50 years in Vietnam family sizes have dropped from 6.5 to 1.7, in South Africa from 5.8 to 2.3, in Bangladesh from 6.9 to 2.1. Ghana, Ethiopia and Tanzania are seeing rapidly dropping fertility rates. You can play about with this on the UN World Population site, looking at various projections - although obviously the further into the future you go the greater the likely inaccuracies.

Health Before Wealth

His argument, therefore, is that we should focus on improving the health of the people in poor countries. If infant mortality drops people will have smaller families and because they’re healthier will be able to work harder, and think better. Fix the health problem and the wealth problem fixes itself. And this accords with the research we looked at in Economic Parasites suggesting that poor countries are poor because their people are unhealthy.

If that thesis is right then anywhere we can see population growth falling is potentially a future growth economy. Of course, there may be hidden variables here – if a country is seeing a reduction in child mortality and in family sizes it suggests it has some functioning institutions capable of managing the processes that make that possible – which in itself suggests the basis of a functioning economy.

Bedroom Economics

One final “fact”. Based on projecting current economic growth patterns by 2035 Ola suggests that 73% of rich consumers will live outside of the developed nations. So will most of the poor consumers, but an investor that focuses on the poverty of the majority will miss the growth from the minority.

If you are – like me – an average investor then the best way of generating excess returns is not to chase story stocks. It’s to invest in the markets that will generate the best returns. As Hans Rosling himself said in a final interview with the BBC:
"Governments can't run bedrooms. Bedrooms run the world"
The future is not being made in boardrooms, it’s being made in bedrooms.


Gapminder was set up by Ola and Hans Rosling and provides visualisation tools to look at the kinds of data discussed here. They promote "Factfulness":
"... the relaxing habit of carrying opinions that are based on solid facts".
If you want to lose a few hours of your life online there are many worse ways of doing so.

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