Why We Believe What We Believe

Most people do not reason from first principles when developing their political views. Rather, they develop a set of views based on their life experiences and retrofit facts and narratives to conform with that worldview (myself included). How else do you explain something like the backfire effect?

David McRaney of You Are Not So Smart writes:

Geoffrey Munro at the University of California and Peter Ditto at Kent State University concocted a series of fake scientific studies in 1997. One set of studies said homosexuality was probably a mental illness. The other set suggested homosexuality was normal and natural. They then separated subjects into two groups; one group said they believed homosexuality was a mental illness and one did not. Each group then read the fake studies full of pretend facts and figures suggesting their worldview was wrong. On either side of the issue, after reading studies which did not support their beliefs, most people didn’t report an epiphany, a realization they’ve been wrong all these years. Instead, they said the issue was something science couldn’t understand. When asked about other topics later on, like spanking or astrology, these same people said they no longer trusted research to determine the truth. Rather than shed their belief and face facts, they rejected science altogether.

In my view most people are “conditioned” to a set of political beliefs over time. The conditioning happens through the interaction of individual effort and experience and external stimuli. The process is path dependent.

If I am an entrepreneur, and I labor diligently for years to build my business and become wealthy and successful, I am conditioned to believe market systems work and are fair in allocating resources. I am more likely to support light regulation and promote individual accountability.

Likewise if I grow up in a community where financial institutions operate with predatory business models, I am conditioned to believe market systems are broken, and that a wealthy few (say, 1% of the population) manipulate markets to strip assets and wealth from communities like mine. I am more likely to support tight regulation and institutional accountability.

These are overly simplistic examples but I find them instructive. For someone like me who believes most individuals act based on incentive structures and not based on rational analysis, this is a powerful idea. It is consistent with the historical institutionalist approach to history, but on an individual level.

From Wikipedia:

A related crux of historical institutionalism is that temporal sequences matter: outcomes depend upon the timing of exogenous factors (such as inter-state competition or economic crisis) in relation to particular institutional configurations (such as the level of bureaucratic professionalism or degree of state autonomy from class forces).[6] For example, Theda Skocpol suggests that the democratic outcome of the English Civil War was a result of the fact that the comparatively weak English Crown lacked the military capacity to fight the landed upper-class. In contrast, the rise of rapid industrialization and fascism in Prussia when faced with international security threats was because the Prussian state was a “highly bureaucratic and centralized agrarian state” composed by “men closely ties to landed notables”.[7] Thomas Ertman, in his account of state building in medieval and early modern Europe, argues that variations in the type of regime built in Europe during this period can be traced to one macro-international factor and two historical institutional factors. At the macro-structural level, the “timing of the onset of sustained geopolitical competition” created an atmosphere of insecurity that appeared best addressed by consolidating state power. The timing of the onset of competition is critical for Ertman’s explanation. States that faced competitive pressures early had to consolidate through patrimonial structures, since the development of modern bureaucratic techniques had not yet arrived. States faced with competitive pressures later could on the other hand, could take advantage of advancements in training and knowledge to promote a more technical oriented civil service.[8][9]

The obvious takeaway from all of this is shouting at people about politics, either in person or on social media, is a complete waste of time and energy. Beyond that, however, this provides an objective framework for understanding why people believe certain things and why people behave in certain ways. This is of critical importance to investors, who must account for higher order, non-linear effects when making decisions.

Barring an “impact investing” mandate, an investor must set her political beliefs aside when making decisions. Rather the investor must focus on the beliefs of others. It is the beliefs of others that impact the economic and market environment.

Just Say No To News

If you have ever owned an individual stock–especially a large cap stock with a lot of coverage–one thing you probably learned very quickly is to tune out day-to-day newsflow. For example, the largest cap individual stock I currently own in my portfolio is Gazprom. Hundreds, if not thousands, of news stories are published daily either about the company itself, or about energy industry or geopolitical events that could impact the stock.

Here are sample headlines from a quick Google news search:

Gazprom Eyes Brazil’s Natural Gas Opportunities

Gazprom—the LNG pivot?

EU says wants Russia’s Gazprom to sweeten antitrust concessions

Russia’s Gazprom Neft ‘holds its nose’ at global oil output cut

Kiev allowed to arrest Gazprom’s property: there is nothing but gas

Russian Parliament to Consider Tax Preferences for Gazprom

You get the idea.

I could spend a lot of time tracking Gazprom news. I could probably write an entire blog just about Gazprom (I am not sure it would endear me to the Russian security services). I would never want for material. But it probably wouldn’t improve my investment results much. It might even hurt my results.

Most of this daily news is just noise. It is exacerbated by the fact that Gazprom is majority owned by the Russian government — pro-Russian and anti-Russian news outlets have every incentive to put out biased coverage. If you immerse yourself in the noise, it is easy to lose track of business fundamentals. You start wondering whether you should buy or sell based on commentary from some journalist (who may or may not be able to read a balance sheet). You will be tempted to sell on every price move, either to avoid a loss or lock in a gain.

The problem is the news cycle moves very, very fast. Business cycles move slowly. The ratio of noise (meaningless information) to useful information in the news cycle is quite high. In the business cycle that ratio is lower. As a long-term fundamental investor you want to think in terms of business cycles as they are more aligned with your investment horizon.

Furthermore, when it comes to things like currency risk and geopolitical risk there is nothing about monitoring news that will give you any more control over the situation.  Either the stock has properly priced the graft, administrative inefficiency, currency risk and geopolitical risk embedded in the business or it hasn’t. You deal with that up front, with the margin of safety you demand at purchase. There is no point getting worked up over day-to-day newsflow. It is not constructive.

So it is with almost all types of news. Especially political news.

We are in the midst of a particularly vicious political cycle in the US. In my view this is a cyclical phenomenon. (Bridgewater did a nice little piece on populism a while back–I don’t believe it’s a coincidence that the last time populism had this much momentum in Western countries was in the decade following The Great Depression) Anyway, the forces that shape the political climate of a given era are much larger than you or me. Much like the geopolitical risks facing Gazprom, the political environment is beyond our control.

A majority of the news we consume is meaningless noise. I am looking at the title of a news story on my phone as I write this: “Woody Harrelson’s Dinner With Trump Was So Bad He Had To Smoke A Joint.” Now if I hate Donald Trump I am laughing at this story. If I am a Trump supporter it is fake news or liberal propaganda and I am angry. I will go to Breitbart and read something uplifting about glib liberal cucks. Vice versa for “Mark Zuckerberg and liberals seek to weaken bail system that keeps us safe.”

Again, this is meaningless noise. But worse than that it is noise that gets people emotionally charged up. That is what most political news does. Indeed it is designed that way–all the better for the clicks and social shares (not to mention Facebook’s margins).

In general I try to keep my political news consumption to minimal levels. I will read the top political stories in the Financial Times. I will also read a brief set of bullets I receive each business day from another investment professional. The bullets are non-partisan and succinctly summarize major developments and strategic considerations for each political party.

Beyond that I am careful about my political news consumption. The reason? Much of it is written to drive an emotional response and precious little of it actually matters. In his book Fooled By Randomness, Nassim Taleb observes:

We just saw how the scientifically hideous George Will and his colleagues can twist arguments to sound right without being right. But there is a more general impact by information providers in biasing the representation of the world one gets from the delivered information. It is a fact our brain tends to go for superficial clues when it comes to risk and probability, these clues being largely determined by what emotions they elicit or the ease with which they come to mind […]

In that sense the description coming from journalism is certainly not just an unrealistic representation of the world but rather the one that can fool you the most by grabbing your attention via your emotional apparatus–the cheapest to deliver sensation.

If the major cable news networks and their legion of apoplectic commentators winked out of existence tomorrow, what would really go missing from your life? (Ditto the HuffPosts, Daily Beasts and Breitbarts) Would this impede your ability to earn a living? Would it diminish your relationships with family, friends and professional colleagues? Would it negatively impact your physical and psychological well-being?

My guess is no.

In fact, if surveys conducted prior to the 2016 election are anything to go by, I suspect most individuals and their relationships would be all the healthier minus the incessant yammering of the pundit class.

So my humble suggestion is that you give the news cycle–particularly the political news cycle–the Gazprom treatment. Ignore it. Or at least ignore it a majority of the time. I suspect you will find it makes very little difference in your life. To the extent it makes any difference at all, it will probably be a positive.