Failing conventionally

Here are three things:

- Andrew Hill says companies would rather "try something that seems uncontroversial and is self-servingly supported by a team of paid advisers — mega-merger, anybody? — even if it is fraught with greater cost and peril" than introduce greater worker autonomy.

- In the IC, I note that professional asset allocators prefer mindless futurology to the "sell on May Day, buy on Halloween" rule, despite the overwhelming empirical evidence in favour of the latter.

- The ECB is considering more QE, even though the policy is of dubious efficacy especially when bond yields are already low.

These are all examples of Keynes' famous saying, it is better for reputation to fail conventionally than to succeed unconventionally. (The context in which he says this is also still relevant today - the tendency of professional investors to follow short-term fashions.)

The question is: why is this?

One reason is simple self-interest. The CEO who thinks that his minions know better than he does, or the fund manager who thinks that asset allocation can be done by the calendar rather than by professional judgment or fancy optimization tools, will lose his raison d'etre. And as Upton Sinclair said,"it is difficult to get a man to understand something, when his salary depends on his not understanding it."

The same thing explains Keynes' example. The fund manager who bets against the market risks under-performing and hence losing his job - as Phillips and Drew's Tony Dye famously discovered during the tech bubble. The one who goes with the herd keeps his job.

There might, though, be a second reason.

The Overton Window doesn't just exist in politics, but in finance, economics and management too. Some things are inside the window and acceptable - such as mergers, "professional judgment" and orthodox QE - whilst others, such as worker management, simple investment heuristics or helicopter money*, are outside it. Bosses, fund managers and experts want to maintain their image as Very Serious People - defined by Paul Krugman as "someone distinguished by his faith in received orthodoxy no matter the evidence". To signal this, they support for policies within the Overton Window, regardless of their merits. In doing so, they are exercising expressive rationality - signalling that they are proper members of the elite.

Identity politics isn't just the province of silly teenage students. It can be found in boardrooms too.

* In fairness to the ECB the politics of helicopter money for the euro area would be monstrous.

Comments

[An Alien Visitor]

"sell on May Day, buy on Halloween" rule,"

But wouldn't this change if everyone followed this example?

It is a bot like switching energy companies and saving money, if everyone did it all the time you wouldn't save money! And then you may end up losing money.

Changing behaviour changes the rules.

[Bill Posters]

I have asked around in the trade. I believe the Overton Window is now double glazed.

The Overton window used to be a wooden frame with a single pane of normal 4mm float glass. Even with thermal backed curtains a few ideas could get through.

Now the Overton window is modern uPVC double glazed with toughened glass. The sealed units are argon filled.

The uPVC is indestructible. The only hope is to wait for the units to blow could take 20 years if the installation was done by a reputable FENSA registered outfit.

[Brian]

This was a very interesting piece.

[Paddy Carter]

w.r.t QE - I really think people are misled by the numbers.

suppose we had a policy at our disposal which we knew has a really small impact on unemployment, suppose it reduces unemployment it by 0.1 percentage points, somewhere north of 30 thousand jobs protected/created, but this policy only "costs" £1m. Supporting that policy would be pretty uncontroversial. Now suppose that same policy is actually £375bn of QE - that doesn't look like very good value.

But what are the costs of QE? In the narrow sense printing money costs *nothing* other than inflation, and right now that's not an issue. OK, you could argue there are some harmful knock on effects of QE, and if so that would matter. But the point remains that the nominal sums involved in QE are extremely misleading - I think people cannot help think of it as "spending" £375bn on QE, and it really is not. People are not helped by rubbish journalism I am looking at you The Guardian.

[Phil T]

"The fund manager who bets against the market risks under-performing and hence losing his job."

The fund manager who bets with the market is nothing more than an expensive tracker fund and will almost certainly lose their job for not out-performing the market.

[john]

"The fund manager who bets with the market is nothing more than an expensive tracker fund and will almost certainly lose their job for not out-performing the market."

Hmmm, exactly backwards. The fundco that can keep below but within striking distance of market averages may not enjoy investment success, but the likelihood of *business* success is high, adding oodles of fee-paying assets in perpetual annuity. The gains from owning an investment business vastly exceed the gains from owning an investment portfolio.

All the pro investors know that as a group they cannot outperform, so they adjust their game accordingly.

[Kaleberg]

"The fund manager who bets with the market is nothing more than an expensive tracker fund and will almost certainly lose their job for not out-performing the market."

That's not true. In IT they used to say that no one ever got fired for buying IBM. If matching or beating the S&P 500 (or similar index) was the criterion for keeping one's job running a fund, fund manager tenures would be much lower than they are.