What Do Donald Trump and Markets have in Common?

Christmas came early this year, and my present is: Donald J. Trump, who has given us all a delightful graduate level course in epistemology — understanding what we do and don’t know and how little most of us understand.

This is not a takedown of Trump. My target is those who think they know better — pundits, media commenters and party strategists — but have demonstrated that they know little to nothing.

I make no claim to know better. I have no expertise in political analysis or policy wonkery. I have no special insight into the U.S. political process or the outcome of the 2016 presidential elections.

But what I can tell you as a close observer of crowd behavior — a professional calling of mine for more than two decades — is that the media, political parties and just about everyone else are illustrating some principles of human psychology and error recognition, and in particular, the difficulty of identifying what you do know, what you think you know, and how much you have yet to know. The Trump phenomenon is a wonderful opportunity for investors to look objectively at a very different, yet parallel universe, to discover the cognitive errors that we all make.

If you are a trader and the above doesn’t sound familiar, you should consider liquidating your portfolio and changing profession.

Consider Trump’s success, along with some of the more foolish pronouncements along the way. “Peak Trump” has been declared more times than I can count. If he were a stock you had shorted, the margin calls would have begun weeks ago, and most of the so-called political experts would be bankrupt.

At this point, the only thing we know about the Republican presidential primaries is that we have no idea how they will turn out.

I have repeatedly talked about the futility of forecasters trying to accurately assess complex systems with numerous interactive variables and exogenous factors far in advance of some future event (see this, this, this, this, this, this, this, this, this, this and this). Clearly, my work is not yet done.

Bearing in mind that the first votes won’t be cast in Iowa and New Hampshire until February, here are three things to consider:

• The early (and obsessive) focus on polls so far in advance is misleading: Leaders in polls change constantly over time;
• Neither Iowa nor New Hampshire are especially representative of the rest of the U.S.;
• In recent cycles, these two contests have been almost useless in predicting the next Republican nominee.

Those pesky facts are merely an annoyance to those who make their living peddling forecasts. Whether they are talking about the economy, markets or politics almost does not matter, most of these prognosticators are not especially good at making predictions.

Hence, the mass hysteria and hand-wringing over El Trumpo is further reason to mistrust “experts.”

To quote the novelist and screenwriter William Goldman, “No one knows nuthin’.” We have applied this to predictions about markets and forecasts about the economy. Now, you can add political prognostications to the list.

Originally published as Beware ‘Peak Trump’