Monday, May 18, 2015

Beyond Bubbles

It used to be the case that you could take things apart, put them back together, and you would know how things worked. Not everything, but at least the things that people had made. 

I once went a reunion of people who had been in the same university residence as me, but up to 40 or so years before.  The anecdotes shared from my year were about the washing machines being connected up to the internet so that you could know what stage of the cycle it was. That way you could rush down from your room rather than waiting down in the dingy laundry. The start of the internet of things. This was odd for older old boys who used to have their washing done for them. The older anecdotes included taking apart someones car and putting it back together again inside the inner quad of the residence.

Part of our material progress from impoverished farmers has come at the cost of complexity. Good luck to the 20 year old students who try the same car destruction reconstruction trick today. With driverless cars, realistic renewable energy and artificial intelligence knocking on our doors comes accepting that there are some things we can't understand. There is just too much to wrap our heads around.

It isn't just cars. Even when it comes to ideas, there seem to be Nobel Prize winners on both sides of arguments. My favourite example is the joint prize for Economics going to Eugene Fama and Robert Shiller. As a complete oversimplification, one is famous for saying the market is efficient and one is famous for saying it isn't. If you believe in market efficiency, your best call of action is to invest in a fund that just tries to get the average return of all the investable companies. You believe that the costs involved in trying to do better than that aren't worth the effort.

 

Some famous investors who do believe they can do better than the market, still advocate that the average investor just aims for average. When asked about his widow's investment plan, Warren Buffett says "My advice to the trustee could not be more simple: put 10pc of the cash in short-term government bonds and 90pc in a very low-cost S&P 500 index fund." He suggested Vanguard's. Vanguard was started by John Bogle who is a very strong advocate of aiming for average being the best way to get better than average returns (since you minimise costs).

Whether building stuff, investing in stuff, or just thinking about how society should work, it's hard to wade through the very smart people who speak very convincingly on all sides. When it is building stuff, we can just delegate that and drive the car without knowing how it works. For other things, that messes too much with our feeling that we should take responsibility for our decisions. Not understanding stuff is very uncomfortable. So the tendency is to find someone hardcore who agrees with you. You don't even have to read their whole book. You just need a few soundbites and a picture of them with the award to give some back bone to ideas when they are challenged. You can even say 'research has found' before making your point. It isn't like other people will have the time to research and rebuff the ideas either. This is called Confirmation Bias. If the stuff you read comes from your friends, family, colleagues, Facebook, Twitter, or even your favourite academic, you are likely going to be very confused as to why people disagree with you.

This easiest way to handle this, is to decide they are evil or stupid. On Facebook you can even just unfriend the people who see things differently. Doing more than just waiting for your chance to speak requires a lot of effort. It requires going beyond polite conversation. It requires letting people you disagree with know you are still on their side.

Bubbles are easier. Beyond Bubbles is better.

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