Conventional Thinking and Regression to the Mean

We’ve all had the experience. Someone is telling you you’re wrong – they nod their head sadly and tell you no one thinks that way, that your view is just not a common sense view. What follows that always starts with the key two words – everyone knows. What it is, in particular, that everyone knows, is then offered you in list form, sometimes with derision and sometimes with patronizing mock-patience. And sometimes you’re told what experts think – to demonstrate that the conventional way of looking at things is not only logical, but greater minds have thought these things through, so you don’t have to, and simply everyone agrees. You’re just being difficult.


You give in – or say you do – and you remember that business from statistics, the regression toward the mean. The more you examine what seems random and unusual, the less there is of it each time you measure things – over time things tend to level out, and in terms of who is right and wrong about anything, things settle into the generally accepted conventional wisdom. Don’t worry, be happy.


The problem these days – with the economy collapsing and millions losing their jobs, and homes, and confidence that any of it can be fixed – is that you’re bombarded with mutually exclusive assertions about what is generally accepted conventional wisdom, what everyone simply knows to be true. Listen to Larry Kudlow and Jim Cramer on CNBC and you’ll be told that everyone knows the only way out of this mess is by eliminating the capital gains tax, and keeping the rich paying lower tax rates than anyone else, as penalizing success is the last thing you want to do – and somewhere in there you get the idea that any sort of safety net for those in trouble is a moral hazard, and FDR, if he didn’t cause the Great Depression, surely made it worse by making it too easy on people and too hard on big business. Free business, so it can create supply. If it’s cheap and easy to make stuff, they’ll employ people and things will get booming again. They say everyone knows this, and say the late economist Milton Freidman proved it all long ago. And then they nod their heads sadly and say it all again, very slowly, for the dim-witted.


On the other side you get economists like Paul Krugman, with his Nobel Prize and all, saying that the government has to spend as much as possible – to get people working again – and has to fully fund the social safety net. And forget lowering taxes for the rich – lower taxes for the average Joe. The more people who have jobs, and ready money to spend, the faster we’ll get out of this. Krugman says, repeatedly, that the stimulus package is too small. FDR had it right – get people working, on anything – roads, bridges, dams, crappy murals – so they have a paycheck, and spend some money. FDR saved the country. Create demand, and the necessity for supply will follow – business will boom. Krugman and those on his side say everyone knows this, and say the late economist John Maynard Keynes proved it all long ago. And then they nod their heads sadly and say it all again, very slowly, for the dim-witted.


It’s all very tiresome, and a bit confusing. There has been no regression toward the mean. In an odd way it’s a bit like what happened out here in the movie business when MGM found itself pounding out potboilers and elaborate musicals, one right after the other, and all the potboilers and musicals started to look just like the last one, forcing Samuel Goldwyn to utter one of his most famous directives – “Let’s have some new clichés!”


Well, Samuel Goldwyn was amusing (“Please write music like Wagner, only louder”) – but he was onto something. It may be time for new clichés.


Even the guys at CNBC know it. Take the curious case of Barry Ritholtz – a regular guest on Kudlow and Company, Power Lunch and Jim Cramer’s Fast Money. You see him on Bloomberg, Fox, and PBS, and his book Bailout Nation is on the way. And he is CEO and Director of Equity Research at Fusion IQ – if you need institutional grade research you use them. And he was Chief Market Strategist for Maxim Group, a New York Investment bank – managing over five billion dollars in client assets. He’s a big gun.


So why is he saying this is the greatest financial lesson he has ever learned:


You’re a monkey. It all comes down to that. You are a slightly clever, pants-wearing primate. If you forget that you’re nothing more than a monkey who has been fashioned by eons on the plains, being chased by tigers, you shouldn’t invest. You have to be aware of how your own psychology effects what you do. This is why we as investors sell at the bottom, get panicked. All the other lessons I’ve learned have come out of that – as has the field of behavioral economics.


He agrees with Samuel Goldwyn:


Wall Street clichés, like “cut your losses and let your winners run” come back to prevent the monkey part of your brain from doing what it does. There’s a banana – I want it. That’s how chimps behave. Us humans react to greed and fear in predictable ways. We are predictably irrational. If you understand that you can take steps to prevent that – we don’t own anything in the office that doesn’t have a stop-loss on it. In 2008, we watched the market go down 40%. We figured out we’re chimps, and don’t let the chimp inside us make those chimp-like decisions.


He has new cliché now:


Every good financial decision I’ve made comes from, “Wait a second, monkey boy, step back, don’t do that.” Once you realize how your own brain chemistry works against you, it gives you a chance to not panic at the bottom.


Keynes did mention something about animal spirits being a bit of a problem in economic decision-making, but wasn’t quite so blunt.


But that may be the new cliché – see Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism – George Akerlof and Robert Shiller. It seems Obama’s budget director is reading that book carefully.


But really, economists generally say boring stuff – they give quite conventional opinions. Tyler Cowen at Marginal Revolution suggests all influential people do that – it just happens – “We are talking about the time series here, as people rise in influence.”


He sees a few mechanisms:


People “sell out” to become more influential.


As people become more influential, they are less interested in offending their new status quo-oriented friends.


As people become more influential, their opinion of the status quo rises, because they see it rewarding them and thus meritorious.


The status quo is good at spotting interesting, unusual people who will evolve (sell out?) and elevating them to positions of influence.


Oddballs who are influential arrive first at where the status quo is later headed, and eventually they end up looking conventional.


Influential people are asked to write increasingly on general interest topics (“How to Be Nice to Dogs”) and thus they find it harder to be truly unconventional. They cultivate skills of conventionality because that is what they are paid for or allowed to express.


It’s more than a case of regression toward the mean. It’s a cultural phenomenon. Scroll down and you’ll see one of his readers, Alex Tabarrok, wrote about a variation on this:


Cowen, Tyler and Alexander Tabarrok. 2000. An Economic Theory of Avant-Garde and Popular Art, or High and Low Culture. Southern Economic Journal 67(2): 232-253.


ABSTRACT: Artists face choices between the pecuniary benefits of selling to the market and the non-pecuniary benefits of creating to please their own tastes. We examine how changes in wages, lump sum income, and capital-labor ratios affect the artist’s pursuit of self-satisfaction versus market sales. Using our model of labor supply as a guide, we consider the economic forces behind the high/low culture split, why some artistic media offer greater scope for the avant-garde than others, why so many artists dislike the market, and how economic growth and taxation affect the quantity and form of different kinds of art.


So THAT explains Miles Davis, and his unfortunate last albums.


And Matthew Yglesias adds two more to Cowen’s list:


Influential people’s opinions become conventional; thanks to the fact that he has a New York Times column “what Paul Krugman thinks about economic policy” largely just is conventional wisdom among American liberals.


An ethic of responsibility – the more influential you are, the more risk there is that someone will take your “interesting” idea and actually put it into practice, with potentially disastrous results. The influential person sticks to those among his views that he has the most confidence in, which are probably his most conventional views.


Yglesias allows the obvious – “maybe we just perceive as ‘influential’ whoever’s opinions seem most conventional.” It is a puzzle.


James Joyner at Outside the Beltway offers this:


…an even simpler explanation is that influential people (by definition) shape the conventional opinion and are more likely to spend their time exposed to other influential people and, therefore, to influence one another.


In essence, then, it’s bidirectional: Influencers tend to influence one another, creating convergence of conventional opinion.


Daniel Larison goes deeper in Why Prevailing Wisdom Prevails, Even When It Isn’t Wise, and starts off knocking down one idea:


First, I should say that the phenomenon of “selling out” is not really all that common. The accusation may get thrown around a good bit, but usually those in a position to “sell out” never bought into ideas that were all that marginal or unconventional. Selling out implies that you have exchanged some deeply-held view or loyalty in exchange for personal advantage, but this rarely happens. More often, the people who gain influence never staked out particularly unconventional views early on. They were already temperamentally inclined to accept prevailing wisdom, and as they moved into different contexts they adapted to whatever the prevailing wisdom was as easily as they had earlier. For that matter, people who are uninterested in accommodating prevailing wisdom tend not to go into political or media careers where that habit of accommodation is very useful, partly because they find the importance of this habit in such careers to be a reason to do something else.


Okay then, the psychological profile of those who tell you what’s really what – either Larry Kudlow on CNBC or Paul Krugman in the New York Times, each nodding his heads sadly and saying it all again, very slowly, for the dim-witted, is clear. These guys accept what they themselves have been told, and have a deep need for acceptance. That’s possible.


Larison argues that there never were any original thinkers:


It is not as if there are many current defenders of prevailing wisdom who were once hard-core radicals opposed to fundamental assumptions that supported the status quo and then somehow accommodated themselves to the status quo. For the most part, major changes in a person’s political views probably tend towards radicalization, and not towards conventionality. I don’t think I am simply imposing my own experience as a general rule. If influential people continue to hold conventional views, this is because they were by and large brought up with these views and conditioned by their educational institutions to accept and articulate these views. My guess is that most holders of unconventional or marginal views tend to come to these views as they age, and through personal experience or study come to find the conventional views they received when they were younger to be false or flawed in some way.


You grow into thinking in new ways:


Disillusionment with conventional views seems to me to be a more common experience than falling under the spell of conventional ideas. Part of this is a function of a basic characteristic of conventional views: even if they are largely right, they are not terribly interesting or engaging, and with distressing regularity they are not even right.


Once established, a conventional view either endures or it doesn’t, but it doesn’t tend to make additional converts after it has caught on. Reading The World Is Flat probably doesn’t change the way you look at the world; reading Fooled by Randomness or Pessimism might.


Yep, Fooled by Randomness is a giggle – a professional trader and mathematics professor argues human beings are prone to mistake dumb luck for consummate skill. It’s almost always dumb luck. Sorry, but you’re not that special. Pessimism argues that pessimism is great stuff – pessimists are the people who get things done. The World is Flat is obvious and shallow drivel.


And Larison says too, you must understand everyone has limited time and limited information:


Most people, including most influential people, are not going to pay close attention to a wide range of subjects because they do not have the time to do so, so they will tend to rely on others. This puts them, like most of the rest of us, at the mercy of expert or insider consensus or some other form of groupthink that forms in reaction to the consensus. Most will not have the time to investigate a subject thoroughly enough to determine whether this consensus is correct or not, but will retreat to appeals to the authority of the experts or will settle for the prevailing wisdom that exists on their “side” of a given debate.


And we go along:


Relying on expert consensus or some other form of groupthink for information on many issues, most people are going to accept the conclusions they receive. Even when the consensus is staggeringly wrong, or groupthink has led numerous influential people astray, the very fact of the consensus will be cited in their defense, as if to say, “You can’t expect me to have thought independently about this question – that’s someone else’s job!”


There are other social pressures and incentives at work, no doubt, but I think a crucial part is that accepting conventional views is simply far more convenient and involves less work.


So everything regresses to the mean – and in all the senses of that word. And we really do need new clichés.


But don’t worry – someone will nod sadly and tell you you’re wrong.


About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
This entry was posted in Conventional Wisdom, Economic Theory, FDR Made the Great Depression Worse, FDR Saved America, Keynes versus Freidman, Relying on What Experts Say, Supply-Side Economics Discredited. Bookmark the permalink.

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