Fairy Tales

The Irresistible Psychology of Fairy Tales

The ‘fairy tale’ of the pseudo intellectual kind is also booming, particularly in the social sciences.

That’s why those pop psychology books are so popular, by telling the masses what they want to believe. Taleb: the fairy tale that buying out-of-money puts is a profitable strategy, that quantitative finance is is useless, and that statisticians are fools. Gladwell: the fairy tale that 10,000 hours of ‘deliberate’ practice can turn anyone into a ‘pro’, and that environmental factors trump IQ. Even as early as 1st grade, teachers can easily identify the intelligent and dull kids, long before 10,000 hours can kick in. These advantages and telltale signs of high-IQ manifest themselves early, with the gap between the smart and everyone else widening without paucity as the years pass. Daniel Kahneman: the fairy tale that smart people are no more rational than less intelligent people, because smart people occasionally fall for logical fallacies such as anchoring bias and the conjunction fallacy. Dan Ariely: similar as the aforementioned authors, with books about how people are irrational, a message which appeals to liberals, who want to believe that no one is better than anyone else.

It’s interesting how intellectual trends rise and fall. From 2009-2012, around the same time as the IQ wars, we saw the rise and convergence of behavioral finance with pop psychology to explain the apparent failure of homo economicus and rational expectations during the financial crisis. But, six years later, with the bull market still going strong, homo economicus may be having the last laugh. Behavioral finance and irrationality implies that markets are inefficient, yet all the evidence points to the equity markets being more efficient than ever, which could explain why mutual fund ‘alpha’ has been shrinking over a decade.