From David Brooks: Does Decision-Making Matter?
It’s not a coincidence one of the world’s most overrated authors, Michael Lewis, is writing about two of the most overrated Nobel Prize recipients, Daniel Kahneman and Amos Tversky. Behavior psychology is not the equal of a ‘hard science’, and Michael Lewis’ books all have a leftist slant to them, such as The Big Short, in which he blames Wall St. greed and banks for the crisis, not politicians such as Clinton. Between 2006-2012, in the years before, during and shortly after the financial crisis, many ‘pop psychology’ authors and ‘business gurus’ rose to fame by arguing that the financial crisis was evidence of a permanent ‘paradigm’ and ‘status quo’ shift, and that systems and beliefs (such rational/efficient markets) taken for granted before the crisis had suddenly all failed, and that these business authors and gurus had the answers. Examples of such books include Daniel Kahneman’s Thinking Fast and Slow, Dan Ariely’s Irrational Rational, Nassim Taleb’s Black Swan (and others), Richard H. Thaler’s Nudge, Charles Duhigg’s The Power of Habit, Malcom Gladwell’s Outliers, and many more. To list them all would be subjecting myself and the reader to more pain than is humanly allowable.
Yes, certain elements of the economy have changed in the aftermath of the crisis. For example, the US economy becoming more efficient and the job market becoming more competitive and difficult, but markets and behaviors have not changed. In retrospect, the 2008 crisis, despite all the headlines and predictions of doom and gloom and the ‘demise of capitalism’, was more like a blip or a speed bump. The US stock market has continued to make new highs year after year. The post-2009 S&P 500 and Nasdaq bull market and economic expansion is the longest ever, and the gains are among the biggest.
And same for America’s economic and foreign policy hegemony, which has only become stronger as of 2008, and a far cry from the ‘post-America’ era many on the left in 2008-2009 had hoped for. As more evidence of the strengthening of the American hegemony, the entire world is transfixed on Trump. You go anywhere in the world and all the newspapers and TVs are taking about Trump…that just goes to show important American politics and policy still are. When Trump was elected, it wasn’t just a national event, but it was the biggest international event, too.
While most economics models assumed people were basically rational, Kahneman and Tversky demonstrated that human decision-making is biased in systematic, predictable ways. Many of the biases they described have now become famous — loss aversion, endowment effect, hindsight bias, the anchoring effect, and were described in Kahneman’s brilliant book, “Thinking, Fast and Slow.” They are true giants who have revolutionized how we think about decision-making. Lewis makes academic life seem gripping, which believe it or not, is not easy to do.
‘Rational markets’ work because to try to create a financial model that assumes irrationality would not agree with the empirical evidence. Irrational models imply the existence risk-free arbitrage, but no such arbitrage exists. Evidence of market efficiency is further bolstered by the lousy post-2008 performance of active management relative to the S&P 500. If markets were as inefficient as the left says they are, active management would be able to exploit these inefficiencies to consistently beat the S&P 500, but they haven’t been able to so so, suggesting more market efficiency, not inefficiency.
As you can tell I’m not a fan of cognitive behavioral therapy, behavior/social psychology, behavior economics, business ‘leadership’ books, and stuff like that. The entire field was recently dealt a blow by the inability to replicate results that sounded nice in print but couldn’t be reliably reproduced. A lot of post-hoc analysis and data mining. It’s like saying, ‘we want a study that shows people behave irrationally or are subconsciously racist, so lets keep testing until we get the desired results to sufficiency high significance’. Case studies are also rife with selection biases, survivorship bias, cherry picking, and confirmation biases.
For example, Malcolm Gladwell, in 2010, wrote that his ‘greatest triumph’ was winning a 1500-meter race. He’s being too modest. His greatest triumph was convincing millions of people that the ‘10,000 hour rule’ is a ‘science’. The book I’m referring to is Malcolm Gladwell’s Outliers, as well as Geoffrey Colvin’s Talent is Overrated, both published in 2008 and introduced to the public the delusion, inspired by the methodologically flawed work of K. Anders Ericsson in 1993, that ‘deliberate practice’ can overcome biological or innate limitations. Five to six years later, thanks to numerous studies that tried and failed to replicate Anders’ hypothesis, the 10,000 ‘rule’ has been dealt a serious blow, if not outright debunked. Practice only explains a small amount of the variation in individual ability. Genes matter a lot too. The evidence suggests all top performers have certain biological ‘gifts’ (such a superior eyesight or a high level of working memory) that enable them to acquire high levels of mastery quickly, that most people don’t have. The rule could be salvaged, perhaps, by rephrasing it as, ‘10,000 hours is the minimum amount of practice someone who is already genetically gifted needs to compete with others who have equal gifts’. Of course, such phrasing won’t be as popular, but it’s more truthful.
But back to the main point, trying to explain why some systems are sustainable and keep getting stronger (such as China and America) and others weaker (almost everywhere else), is difficult. Rather then keep trying to predict paradigm shifts to no avail, maybe it’s more productive to try to understand why trends persist.