Give me a lever long enough and a fulcrum on which to place it, and I shall move the world
I went to my local bar last night with a blank piece of paper and a pen. I jotted down some notes.
ultra-social monkeys telling often self-serving stories
highly defended against threatening realities, including of course realities which reflect badly on them
since these monkeys are such fuck-ups, there's no end to painful, disgraceful realities that have to filtered, covered up, or distorted beyond all recognition
And so on. Then I got drunk. I really should finish that 4th Flatland essay. In that draft I call those self-serving stories humans tell themselves congruent outputs.
When I got up this morning, reluctantly, I saw that the Yale economist Robert Shiller had an interesting piece in the Times about humans telling themselves self-serving stories. It's called Rising Anxiety That Stocks Are Overpriced.
The average CAPE ratio [in the U.S. stock market] between 1881 and 2015 in the United States is 17; in July, it reached 27. Levels higher than that have occurred very few times, including the years surrounding the stock market peaks of 1929, 2000 and 2007. In all three of these instances, the stock market eventually collapsed.
Yes, there's a bubble in the stock market. In previous instances, which are rare, the stock market eventually collapsed. Two of those collapses occurred within the last 15 years. And yet, Americans have convinced themselves that this Fed-created "new normal" is a really good idea.
What did Jesus do? He wept.
If you want more details about Shiller's CAPE ratio and history, read his editorial. Those are the facts, but Shiller wants to talk about the psychology of what's going on in 2015. And of course that's exactly what we should be focused on.
Here's the start of the crucial text.
There is a social phenomenon loosely called a speculative bubble that can drive prices, even occasionally for the world’s stock markets, to high levels.
The notion of a speculative bubble was seen for a long time as disreputable in finance circles, but it is gradually gaining acceptance. It takes a different view of the world, more akin to that of psychologists or sociologists.
Imagine that: the notion of a speculative bubble is "gradually gaining acceptance." Will wonders never cease?
OK, here we go.
In general, bubbles appear to be associated with half-baked popular stories that inspire investor optimism, stories that can neither be proved nor disproved.
In recent days, those stories have been about peppy earnings growth or perpetual low interest rates or about the inevitable high long-run performance of the stock market.
During the upswing of the bubble, many people find it useful to latch onto these stories, to profit from the illusions they create. Some of these people are in the investment field, others in politics or the news media. In the words of John Kenneth Galbraith in 1958, they create with constant repetition, because it profits them, a sense of “conventional wisdom” about some inspiring investor story.
As I said at the top, ultra-social monkeys telling self-serving stories.
In a soon-to-appear book, “Phishing for Phools: The Economics of Manipulation and Deception” (Princeton University Press), that I wrote with George Akerlof of Georgetown University, we argue that the proliferation of such stories is a natural part of economic equilibrium.
Successful people who value their careers rely on an instinctive sense for what pitch will sell.
Who knows what the truth is, anyway?
And there, in that simple question, lies Archimedes' lever, the lever, if it is long enough, which can move the world. "Who knows what the truth is, anyway?" Exactly. In Flatland, nobody does, and knowing the truth is never the point in any case.
For humans, outside the scientific realm, there are only the stories they tell. These stories might be mostly true, they might be mostly false, but veracity (adherence to reality) is not the purpose of the story. These stories, to the extent to which they are self-serving or reflect other innate biases or drives, are orthogonal to reality.
What is the psychological purpose of the story in this bubble case and countless others? According to Shiller, "people find it useful to latch onto these stories to profit from the illusions they create." What a beautiful sentence!
But reality exists, and humans always ignore it at their peril.
As time goes on, the stories justifying investor optimism become increasingly shopworn and criticized, and people find themselves doubting them more and more.
Yes. These stories were always just stories anyway, their veracity being irrelevant, and so their self-serving (and optimistic) social utility simply fades over time. In Shiller's phrase, these stories become "shopworn and criticized." The lever which created the bubble can also destroy it when the story changes.
And thus things fall apart.
Even though people are asking themselves if prices are too high, they are slow to take action to sell. When prices make a sudden drop, as they did in recent days, people tend to become fearful, even if there is a subsequent rebound. With the drop they suddenly realize that their views might be shared by other people, and start looking for information that might confirm their belief. Some are driven to sell immediately. Others are slower, but they are all similarly motivated. The result is an irregular but large stock market decline over a year or more.
Recently, people have started to wonder if the market is too high...
And what about those doomers I get so pissed off about? They're just telling self-serving stories. Those doomers are preaching to the choir, and the choir loves it, so those stories serve their (essentially selfish) social needs. The truth of those stories is beside the point, which is what pisses me off. And those stories do damage to other people sometimes, just like the stories which justified another bubble in the stock market. And that pisses me off too.
God knows, you would think I would be used to all this human bullshit by now. Mea culpa.
Have a nice weekend.