The noble lie is a concept that originated in Plato’s Republic. In The Republic, Plato is concerned with the ideal structure for society (spoiler: it’s not democracy). The noble lie is a myth taught to everyone in Plato’s hypothetical society. It justifies the social order and encourages people to do their civic duty. According to the myth this is consistent with the order of the natural world. Even if it means doing things like handing your infant child over to another social caste.
Here in the investing world we push our own noble lie. We’ve built up a mythology around asset allocation, where the long-run risk and return characteristics of different asset classes are assumed to be both knowable and relatively consistent over time.
This is simply not true. The long-run risk and return characteristics of different asset classes are neither knowable nor consistent. What we’re really doing with asset allocation is making inferences based on historical data. From an epistemological perspective, we’re just winging it.
But, as in Plato, our noble lie has a purpose. In our case it’s to facilitate the creation of financial plans. Even though every plan we create is deeply and fundamentally flawed.
I have never tried explaining the epistemological issues involved in asset allocation to a client. In fact, I have never heard of anyone, anywhere explaining this to a client. Sure, there are folks who soft-pedal the idea of “uncertainty.” But I’ve never seen it hammered home. (You would know if the blow landed because the client’s head would explode)
That’s not a criticism. The whole point of our noble lie is that this stuff shouldn’t be hammered home to clients.
It’s simply not productive to get hung up on epistemology. Most people just need to be encouraged to increase their savings rate. They also need talked off the ledge before doing dumb shit like going all-in on PonziCoin or cashing out at a market bottom or allocating 100% of retirement savings to a small biz employer’s ESPP.
That stuff alone can be a lot to handle. So when it comes to asset allocation, it’s usually best to just throw up some historical numbers and talk “stocks for the long run.” No one does this better than Warren Buffett. He functions as high priest of our cult, and he gives a hell of a sermon. Take this one from 2016:
It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.
That view is dead wrong: The babies being born in America today are the luckiest crop in history.
American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well.
There are actually multiple layers of mythology at work here. I won’t bore you with a play-by-play. (I have written about Buffett’s public persona before. See here) Suffice it to say this is tremendously effective writing. But from an epistemological point of view it’s meaningless. It’s just an inference–naive extrapolation from historical data.
I suspect if you carefully examine the world around you, you will find more and more noble lies hidden in plain sight. Mythology is quite powerful. And, as demonstrated by Plato and Warren Buffett, it can also be quite useful.