Nobody goes there anymore — it’s too crowded

When I was a young lawyer I got to meet the great Yogi Berra in a professional context. The Hall-of-Fame catcher and former Yankee manager was a delight in every respect.  He was a very insightful and successful businessman too.

As almost everyone knows, Yogi is also extremely quotable. Yogi’s sayings – “Yogi-isms” – have become part of the cultural landscape.  They entertainingly fracture the language but do so in very interesting and sometimes enlightening ways. 

You can observe a lot by watching.

It was déjà vu all over again.   

When you come to a fork in the road….take it. 

The future ain’t what it used to be.

One of my personal favorites is nobody goes there anymore…It’s too crowded. In the trading and investing world, it’s remarkably shrewd advice.  What works today doesn’t necessarily work tomorrow, in large measure because investment success draws crowds of copycats.  That demand – which can readily become excess demand and thus make its object bid-up and too expensive – often means that what was a good trade becomes played out and no longer is a good trade.  If a trade gets too crowded, you don’t want to go there anymore.

As reported by BloombergBusinessweek, this concept was well illustrated (albeit in a different context) during the recent presidential election.  The Obama campaign was extremely successful raising money over the internet, to the tune of $690 million, particularly via the use of email to potential donors.

Lots and lots of email. 

The email appeals used by the campaign were the product of rigorous experimentation by a large team of analysts, said Amelia Showalter, the campaign’s director of digital analytics. “We did extensive A-B testing not just on the subject lines and the amount of money we would ask people for, but on the messages themselves and even the formatting,” Showalter said.  The campaign tested multiple iterations of each email – often as many as 18 variations – before deciding what to blast out to tens of millions of subscribers.  It’s a great metric – test, re-test, quantify, analyze, adjust and target.  All investors should be so disciplined.

“When we saw something that really moved the dial, we would adopt it,” said Toby Fallsgraff, the campaign’s e-mail director, who oversaw a staff of 20 writers.  Interestingly, despite their intensive and extensive experience, the staff was remarkably poor at predicting what would work and what wouldn’t.  Ugly stuff worked.  A casual sound worked.  Profanity worked.  Surprisingly, no matter how much email was sent, very few recipients opted out.  Jon Stewart hilariously lampooned this effort here (“They’ll end up spamming the living s*** out of you!”).

This adaptability is important from an investing standpoint.  We need to be agnostic as to approach and ideology and simply focus on what works and adjust as things change.  Our points of view and opinions, no matter how strongly held, should always be tentative and subject to change due to new or better evidence.  

One reason things change is that trades get crowded and played out.  You can have too much of a good thing, as the Obama campaign found out.  No email was perfect and none kept working indefinitely. “Eventually the novelty wore off, and we had to go back and retest,” Showalter said.

As Felix Salmon recently put it, “anything which works will eventually stop working, and the less intuitive it is, the more quickly it will stop working.”  In a proposition that is both intuitively appealing and academically supported, as more people enter a trade or employ a strategy, the more and the more quickly their success will deteriorate.  As Yogi himself would recognize, it ain’t over ‘til it’s over, but eventually it is over.


Hope and Change

Despite the seemingly constant claims of the political rhetoric, I don’t expect the economy to improve dramatically after the election no matter which presidential candidate wins.  The inherent problems are real and the risks are high.  Moreover, presidents have far less control over the economy than is commonly assumed.  There are no silver bullet solutions available.

If we are to expect real political progress on economic issues going forward, the current political dysfunction needs to be altered.  I propose three starting points for fixing things.

1. Assume good faith unless and until the lack of it is clearly demonstrated.  We live in a politically polarized time.  The divisiveness is both pervasive and corrosive.  Partisans are convinced that their positions aren’t really debatable.  Indeed, they think (assume even) that their opinions are objectively and obviously true.  After all, if we didn’t think our positions were true, we wouldn’t hold them.  As Jeffrey Friedman has reminded me, Walter Lippmann made this case almost a century ago:

Where two factions see vividly each its own aspect, and contrive their own explanations of what they see, it is almost impossible for them to credit each other with honesty. If the pattern fits their experience at a crucial point, they no longer look upon it as an interpretation. They look upon it as ‘reality.’

In other words, we think our opponents are suppressing or denying the obvious truth.   

Because the base-case assumption — steeped in bias blindness — is that those on the “other side” are not generally acting in good faith, the necessary conclusion is that they must be stupid, delusional or dishonest (for example, see here, here and here – and note the comments). I don’t mean to suggest that politics is not fraught with deception and fraud.  But these should not be our default assumptions.  We should never underestimate the power of confirmation bias or bias blindness

We increasingly couch political and policy arguments in moral terms.  As cognitive psychologist Robert Siegler has argued, we now tend to see elections as more crusade than choice.  But if we are to have any hope of seeing leaders with different viewpoints working together to solve problems, it ought to start with the idea that those who disagree are generally people of goodwill acting in good faith for what they see as the good of the country.  In other words, they may be wrong, but they aren’t necessarily (or even likely to be) stupid, delusional or evil.  Recognition of the reality and the power of our behavioral biases would provide a good start toward making some progress toward a political process that actually works.

2. Commit to the idea that data trumps ideology. We all like to think that we act like impartial judges, making decisions only after a careful weighing of all the evidence. But that is rarely what happens, as the behavioral research establishes beyond doubt.  We are much more like lawyers, scavenging for whatever arguments we can find that might help, irrespective of relevance or accuracy.

Our overriding tendency is to concoct belief systems based upon incomplete evidence or even out of whole cloth and then to set out looking for evidence to confirm what we have already decided. Moreover, we are not anything like objective. We interpret the evidence we do examine in ways that tend to support our prior commitments. We are ideologues through and through. 

Per Friedman, when properly conceived, political and policy questions most often resolve into questions of fact or factual interpretation.  That is not to say that politics does not involve clashes of values.  But they are far less frequent than we assume.  And factual claims are much more conducive to discourse, debate and compromise than moral assertions.

Because we are such ideologues, it can be exceedingly difficult for us to come to the realization generally and (especially) in specific cases that careful factual analysis can answer most questions.  But if we are to succeed as individuals and as a nation, especially with respect to difficult and contentious issues, we must commit to a data-driven process that requires that our political actions and decisions be based upon what can be demonstrated factually rather than upon our ideological presumptions (of whatever stripe).

3. Demand that partisans explain why they hold their views and why we should expect them to work. As Steven Sloman, a professor of cognitive, linguistic and psychological sciences at Brown University recently pointed out in The New York Times, the “illusion of explanatory depth” (an idea developed by the Yale psychologist Frank Keil and his students) means that we typically believe that we understand how complex systems work even (perhaps especially) when we don’t. It is not until we are asked to explain how such a system works that we come to realize how little we actually know.

Significantly, it is not good enough merely to ask people to justify their positions.  Indeed, discussion and argument generally harden positions and make people less likely to alter their views.  To have an impact on their understanding and thus their behavior, we must ask them to explain the mechanisms by which a policy could and would work.  When we do, those with limited understanding tend to moderate their views.  In other words, by demanding a data-driven explanatory process, we increase the likelihood of compromise and perhaps even consensus.  As the expression goes, we’re all entitled to our own opinions, but not to our own facts.

I hasten to add that these three approaches won’t help much if the political factions and the political actors that represent them continue to refuse to engage in substantive dialogue, to resist even the idea of compromise and to see recalcitrance as being in their best political interest.  Even so, no matter how naïve I may be for saying so, these three ideas would offer – like the old joke about 100 dead lawyers at the bottom of the ocean – a really good start.


This post is a follow-up to last week’s Bias Blindness and Political Polarization.

Bias Blindness and Political Polarization

If you doubt the power of confirmation bias or the bias blind spot, simply consider some “analysis” of the presidential election. After last week’s vice presidential debate, polling data suggested that the contest ended roughly in a tie.  Whatever one makes of the data, there was certainly no clear winner.  But if you were watching MSNBC, you saw the pundits there crowing about an overwhelming victory for Vice President Biden.  Last night’s debate appears to have been a narrow victory for the President but, not surprisingly, Fox News disagreed

We live in a politically polarized time.  Even Facebook is full of political messages and imagery. My Facebook news feed today includes multiple passionate defenses and vociferous criticisms of each presidential candidate among my friends. Relationships are being fractured because of it. Just as predictably, ways to avoid the political morass have been created too.  The divisiveness is pervasive.

My sense is that the key element here is that most partisans see “their side” as not just true, but obviously true. It’s a by-product of the bias blind spot.  We tend to see bias in others but not in ourselves. Therefore, our strongly held positions aren’t really debatable — they’re objectively and obviously true.  After all, if we didn’t think our positions were true, we wouldn’t hold them.  And (our thinking goes) since they are objectively true, anyone who makes the effort to try should be able to ascertain that truth. Our opponents are thus without excuse. 

If they disagree with me, they are denying reality.

Accordingly, few partisans accept that their opponents are generally people of goodwill who simply disagree about what is best for the country.  They are deemed as necessarily being engaged in denialism.  To hear the Republican zealots tell it, President Obama is intentionally trying to ruin the country.  Similarly, Democratic ideologues insist that Governor Romney’s primary goals are to start another war and cut taxes for the rich so as to stick it to the middle class and the poor. Because the assumption — steeped in bias blindness — is that the “other side” is not generally acting in good faith, the necessary conclusion is that they must be stupid, delusional or dishonest to take the positions they do.  

Sometimes it’s true that the “other side” (whatever side one chooses) is what I’ll call irrational with intent. But I doubt that it’s the usual case.  We should never underestimate the power of confirmation bias and bias blindness. 

Brad DeLong is an excellent economist.  He’s also a very active partisan (not there’s anything wrong with that).   Ramesh Ponnuru is a fine writer.  He’s also a very active partisan (not there’s anything wrong with that).  After the debate last night, Ponnuru tweeted the following.      

Like the veep debate. Obama stopped the liberal handwringing, so that’s a victory. Otherwise a draw.

Given the closeness of the debate overall (per the data) and Ponnuru’s strong position favoring Governor Romney (our confirmation bias means we all tend to see what we want to see), his conclusion is perfectly understandable.  Given DeLong’s strong position favoring President Obama (confirmation bias and bias blindness are at work in him too, as in all of us), it isn’t surprising that he sees things differently.  He takes his position as being objectively true – not merely his opinion based upon an interpretation of the facts.  Accordingly, the bias blind spot we all suffer – again, we may recognize behavioral biases generally, but we don’t think we are susceptible to them – likely caused DeLong to conclude that Ponnuru was not just wrong, but dishonest.  DeLong’s tweet follows (my emphasis).   

When Ramesh Ponnuru claims he thinks that the debate was a draw in the eyes of America, I know that he is lying to me.

DeLong knows no such thing.  It’s possible, of course, that Ponnuru is lying, that he thought President Obama dominated the debate last night but engaged in activist spin simply because he is (in DeLong’s expression), a lying hack. But there is no evidence to support the claim.  The more likely explanation is that Ponnuru simply saw things differently.  Our behavioral biases provide more than enough basis to support my explanation as the appropriate default, without clear evidence of nefarious intent.

If we are to have any hope of seeing leaders with different viewpoints working together to solve problems, it ought to start with the idea that those who disagree are generally people of goodwill acting in good faith.  In other words, they may be wrong, but they aren’t necessarily (or even likely to be) stupid, delusional or evil.  Recognition of the reality and the power of our behavioral biases would provide a good start toward making some progress in that direction.

We can only hope.


Update: The Wall Street Journal‘s consistently excellent Jason Zweig pointed me to this famous 1954 study which focuses on “selective perception” concerning a Princeton v. Dartmouth football game.  It provides further support to my argument.  Thanks, Jason.

Stopping the Buck

Harry Truman famously kept a small sign on his desk proclaiming that The Buck Stops Here.  The sign refers to the expression “pass the buck,” which means passing the responsibility on to someone else. In his farewell address to the American people, President Truman specifically referred to this concept: “The President — whoever he is — has to decide. He can’t pass the buck to anybody. No one else can do the deciding for him. That’s his job.”

Sadly, President Truman has not had many imitators in this regard — in either party.  Politics today is largely about passing the buck.  In more contemporary language, it’s about kicking the can down the road

In that respect, at least, Mitt Romney’s selection of Rep. Paul Ryan of Wisconsin as his running mate is very good news indeed.  To this point, the entire presidential election cycle has been about avoiding the obvious.  It’s as if the candidates all think that the electorate is stupid with respect to budgetary and deficit realities.

The Democrats would have us believe that raising taxes on “the rich” (however defined, although most seem to think it’s people making more than they do) will get the job done.  In general, Republicans would have us believe that cutting taxes and a few wasteful discretionary government programs will solve our problems.  The Republicans would have us believe that further stimulus won’t help while the Democrats have given us no reason to think that deficit reduction will ever be a priority.  Those claims and arguments are specious in the extreme. 

Before his selection of Rep. Ryan, Gov. Romney’s campaign has been predicated upon the idea that this election is specifically and entirely a referendum on President Obama, his policies and his leadership.  Instead, Ryan’s nomination is a clear signal that the referendum approach wasn’t working and wasn’t deemed good enough.  The election will now be cast as a clear choice about policies and the future.  According to the inside-the-beltway crowd, the Democrats are thrilled (Axelrod; Begala; Krugman)at the prospect. 

I’m not so sure they should be. 

The so-called “Ryan budget” will become a focal point of this campaign. That budget proposal surely has holes (see David Stockman’s critique here) and makes assumptions about revenue growth and budget cuts that are open to severe question as is its effectiveness at cutting the deficit (CBO; Tax Policy Center).  It does  not deal with waste in the Pentagon and elsewhere. It makes policy choices that few will readily be comfortable with. However, Rep. Ryan’s rough outline is a clear improvement over the President’s “budget” (never intended to be taken seriously and rejected unanimously by his own party, essentially never to be mentioned again) and infinitesimally better than anything done by Congressional Democrats, who won’t even offer a budget in the Senate. 

Most importantly, the Ryan budget demands a discussion of entitlement spending and its unsustainability.  Pretending that serious budgetary changes are not necessary — kicking the can down the road — makes no logical or mathematical sense and is horribly unfair to our children (more here).  To the extent that the current debate is forced to consider difficult and necessary choices — choices that few of us like or even wish to acknowledge — the better off we’ll be.  Even if you reject his proffered solutions, Paul Ryan’s entry into the presidential election dynamic has to be a good thing for our children and for the future. 

Difficult choices will have to be made.  The process will begin by discussing those choices and acknowledging the difficulty of the task. We cannot afford to keep kicking the can down the road.