More information can lead to worse decision-making. This study of Italian investors finds that "investors who acquire more information attain lower returns per unit of risk."
This is because of over-confidence. People rely too much upon facts which have little value in predicting outcomes, and as a result take too much risk.
This is not just a problem for people daft enough to be stock-pickers. If this is true of investment decisions, isn't it more likely to be true of political beliefs? I say so for four reasons:
1. Incentives. If I make a bad investment decision, I lose money. If I hold bad political beliefs ("you do" you cry) I lose nothing.
2. Feedback. If I pick bad stocks, I lose money. End of, no excuses. But if my favoured policies seem to have adverse effects, I can hide behind loads of immunizing strategies: the policy was badly implemented; there are other causes; the problems are just short-term, etc.
3. Biased information. The "facts" that form political beliefs are more likely to be a biased sample than those which form stock-pickers' opinions, as they are likely to be disproportionately drawn from friends, bloggers and newspapers who share our beliefs.
4. Groupthink. Stock-picking tends to be a private activity, whereas political beliefs are shared with our friends, fellow bloggers and party colleagues. This can lead to over-confidence in our beliefs, as we think "he's a good guy and he agrees with me - I must be right." Significantly, it seems that when stock-picking is done by groups (pdf), performance worsens.
For these reasons, Mick Hume is right to complain about politicians' reliance upon scientists. The danger is that, as politicians get evidence from scientists, their confidence in their policies will increase by more than the evidence actually warrants.
And the scientists will behave less and less like scientists, and more and more like just another bunch of spivs.
Posted by: dearieme | November 21, 2007 at 12:47 PM
'If this is true of investment decisions, isn't it more likely to be true of political beliefs? '
I would have thought not, because it is a consequence of market efficiency.
Posted by: james c | November 21, 2007 at 01:28 PM
But investors returns depend on predicting what OTHER investors will predict. Investors who gather more information may be right, but if everybody is wrong, they are wrong.
Posted by: reason | November 21, 2007 at 01:59 PM
In other words, groupthink surely is one of the defining features of investment markets.
Posted by: reason | November 21, 2007 at 02:00 PM
For these reasons, Mick Hume is right to complain about politicians' reliance upon scientists. The danger is that, as politicians get evidence from scientists, their confidence in their policies will increase by more than the evidence actually warrants.
So instead they should rely on Astrologers or political advisors? Scientists, I know (my father was one), are always cautious with their prognostications (except when they are trying to extend their funding). If politicians, don't allow enough for uncertainty then surely that is a problem with politicians, not scientists.
Posted by: reason | November 21, 2007 at 02:03 PM
James C - the question is: why doesn't the experience of investors with poor Sharpe ratios lead them to conclude that markets are (mostly) efficient? If people can miss this truth in investing, how much more likely are they to miss important facts in their political thinking?
Reason - you're right, the problem is with politicians, not (generally) scientists. For example, how many politicians have a basic grasp of statistical concepts such as confidence intervals?
Posted by: chris | November 21, 2007 at 02:25 PM
But the market isn't scientific, it's irrational, science predicts and the market isn't predictable. If it was then I wouln't be sitting here I'd be lying on a caribbean beach with Kylie Minogue.
In what way are politicians reliant upon scientists ? No disrespect but economics isn't a science, political science isn't a science, social science isn't a science. Politicians problems are rooted in the fact that they attempt to enact legislation based on principles which have no emiprical basis. Science says there is no emiprical evidence that equality is a natural, acheivable or desirable state and yet politicians formulate policies which attempted to acheive it. The problem with modern politics is that it's based on emotion, not reason.
Posted by: Matt Munro | November 22, 2007 at 12:59 PM
Science says there is no emiprical evidence that equality is a natural, acheivable or desirable state and yet politicians formulate policies which attempted to acheive it.
Ha, ha, ha. When?
If that was so, they would set their own salaries to be equal to average wages!
Posted by: reason | November 22, 2007 at 02:03 PM
Matt Munro..
your last comment is self confirming (assuming that your comment is political).
Posted by: reason | November 22, 2007 at 02:16 PM
MM
Maybe I'm doing you a disservice. Maybe you mean to be a comedy act.
Posted by: reason | November 22, 2007 at 02:18 PM
And science doesn't deal with "desireable". That belongs to ethics and aesthetics.
Posted by: reason | November 23, 2007 at 08:15 AM
Reason - you appear to be having a dialogue with yourself ? I on the other hand am condemned to ridicule for speaking modernism in the post modern age !
My point is
Nature is an unstable system in perpetual conflict with itself, from the sub atomic level upwards. From this instability, equilibrium (not equality) arises. Your own brain, believe it or not is in perpetual conflict with itself, constantly selecting which inputs to attend to and which responses to make from a competing range of alternatives. All elements and all organisms compete, pecking orders are established and weaknesses are filtered out, as part of a continual process of survival and self improvement.
Throw some bread to a crowd of pidgeons, do they sit down, discuss it and then share it out equally, or does the biggest/most agressive one take the lions share and leave the rest to fight over the scraps ? Where in nature is there equality ?
It's easy to say "We should share things more equally" - as politicians do - it's a meaningless "I desire the desirable" statement that plays well with the electorate. Social justice, social mobility, no selection, equality of opportunity/outcome and all those good cries are attempts to impose an unnatural construct on society. The reason they don't work is nothing to do with their desirability, but with their unnaturalness.
Posted by: Matt Munro | November 23, 2007 at 10:51 AM
I don't listen to what people, I look at what they do. I see no evidence what so ever that modern politicians regard equality as a high priority.
Posted by: reason | November 28, 2007 at 10:01 AM
Burning straw men is a popular sport.
Posted by: reason | November 28, 2007 at 10:02 AM