The Cognitive Dissonance is Strong in This One

Stick With Numbers When Judging Trump’s Rally
Anything else is just story-telling in the interest of scoring political points.
Bloomberg, October 20, 2017



Whenever I write about anything with even a vague political component, I always get the strangest correspondence. Much of it is unpublishable and sometimes amusing, and usually worthy of nothing more than a Twitter block. And yet these missives offer something useful about one of my favorite subjects: Why our brains are not wired for finance.

That was the case last week, when President Donald Trump tweeted the following : “It would be really nice if the Fake News Media would report the virtually unprecedented Stock Market growth since the election.”

That statement about the stock market can be easily checked. This has nothing to do with your party affiliation or political views; it is a very simple mathematical question. The statement is either true or false, and not subject to debate.

That is what I did in an article that examined the historical record (as did Bloomberg News). As it turned out, his statement was false. The Trump rally is OK, but it is nowhere near unprecedented.

 Some of the pushback from readers was — hmmm, how can I say this? Fake news.

I won’t mention anyone by name, but a few excerpts are worthy of discussion. They are wonderful examples of how we have trouble reconciling facts with our biases, and why partisans and investors alike are predestined to make certain mistakes over and over.

The emails, among other things, said my analysis of Trump’s claim was “disappointingly facile,” that I “ignored other economic indicators,” or that I was “overly focused on the numbers.” And my inclusion in the comparison of “international markets” was biased.

More specifically:

“You overlooked several points that would strengthen Trump’s case. FDR’s recovery had the advantage of rebounding from the Great Depression, and JFK also benefited from a rebound from a recession.”

This is an odd statement: I was discussing market performance, not an analysis of how different presidents did relative to the economy under their predecessor. This is a classic case of cognitive dissonance — the refusal to acknowledge a fact because it contradicts a strongly held belief or ideology. Oddly enough, it came from a professor of psychology at a well-regarded southern university.

There was more: “You refer to mean reversion, but they conveniently ignore how it may have benefited others on the list ahead of Trump.” Again, our task was not to rationalize the prior rallies or their causes, but instead to determine whether Trump’s claim was accurate.

More than one emailer pointed out that Trump’s rally is “unprecedented in terms of the timing of the rally relative to the duration of the economic expansion. The current expansion is 8 years old. It’s notable that only 2 economic expansions since the Great Depression were as long or longer than this one, and yet, the market shows no sign of slowing under Trump.” This may or may not be true, but certainly it isn’t what the president claimed. And as I have said before, all presidents get too much blame when markets or the economy heads south and too much credit when things go well.

Some people complained about comparing the U.S. markets to other countries. 1  This is a weird statement to make in 2017, when the rest of the world has become an ever-larger portion of both global output and total equity-market capitalization.

And yes, I “completely ignored other economic indicators, such as GDP and consumer confidence” because that was not what the president referred to in his tweet. I only examined the accuracy of the president’s assertion.

In other word, I looked at the issue quantitatively by relying on the mathematical performance returns, with as little subjective interpretation as possible. The approach many others seem to have taken is to consider Trump’s statement qualitatively, which entails relying on a selected set of facts to tell a story. There are many problems with that approach because it tends to give way to bias and subjectivity. Those who take this approach are trying to rationalize a political talking point of which president’s rally is better or worse; I was focused on objectively answering that question. And as if we needed further proof that bias is a powerful thing, some readers disputed the notion that quantitative analysis wasn’t more objective than qualitative analysis.

The real culprit here is evolution: Many of the common errors we see today are manifestations of survival strategies that were effective thousands of years ago but are much less useful today. The tendency to see patterns where none exist, to focus on negative (as opposed to positive) news; story-telling and groupthink — all are reflections of our primordial instincts. They were critical in helping out ancestors work within social groups on the savanna in an ever-changing, challenging environment.  But they serve no purpose in finance; indeed, these ingrained responses often lead to trouble.

Unlike political partisans who are focused only on the outcome of the next election, investors have money riding on the information they consume and use. That is why I prefer to stay with numbers rather than engage in story-telling.



1. For example, “Greece’s market has NOT even remotely recovered from the losses since 2008,” one reader wrote.


Originally: Stick With Numbers When Judging Trump’s Rally


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