Wednesday, February 4, 2009

Bless the Cassandras

Much that has happened in recent days has persuaded me to speak today to the conflict between stock market optimists and pessimists, pollyannas and cassandras, bulls and bears, in the broadest of terms. There is a general thesis to be uncovered here, one that has its basis deep in human psychology and has a rather intense manifestation just now in pop culture, and what passes for economic discussion, in the US. The thesis is: we need more cassandras, not fewer: correspondingly, we need to encourage those we have, not chase them about with sticks.

Ideally, I suppose, pessimists and optimists could be partners, taking on the common search for truth about the economy, about particular companies, about stock prices, etc., from distinct but complementary perspectives. Every glass that is half empty is also half full. For that matter, every glass that is three-quarters empty is one-quarter full. No glass is entirely full, no benefits in this world come without costs. So why need bull and bear compete when it is so much more important and interesting to inquire?

But we as human beings want to be optimists. Sociobiologists could trace it to the survival instincts on the Serengeti -- the pessimist who saw every source of water as contaminated and dangerous would die of thirst and pass along no genes. At least the optimists would drink -- they wouldn't die of thirst -- and although some of them would die of the contaminants others would live and pass along those optimist's selfish genes. If you accept such reasoning then, you'll suspect that optimism is by now the greater danger, and the pessimism discouraged by genes needs to be encouraged by memes.

Even if you don't accept such reasoning, you can and should look about you at American pop culture and see where the danger comes. Every incarnation of "Miracle on 34th Street" teaches that belief, even gullibility, is good and skepticism is a condition that requires magical cure. More contemporary movies, like Jim Carrey's "Yes Man" convey the same message. Saying "no" is bad. Sum up such influences, and then let your inner contrarian take over. When everyone is telling you how wonderful it is to be a bull, then perhaps the perspective of the bear is the one that needs reinforcement.

Yet again: look at the recent history of the stock analysts' vocation. When someone predicts a stock will rise, and it rises, is he roundly condemned as a huckster and hype artist? No ... he is praised for getting the call right of course. On the other hand, when someone predicts a stock will fall, and it falls, is he generally praised for getting the call right? No ... he is accused of "talking it down," defrauding those who bet the other way ... he is sued. This is not a theoretical concern. People who expressed reasonable (and as it turned out, accurate) concerns about Novastar Financial Inc., for example, were ridiculed and reviled, their points routinely dismissed. When Novastar tanked, did the dispensers of that ridicule feel, well ... ridiculous? of course not. The bias toward hype and the prejudice against skepticism is so widely shared it can survive any number of such disconfirmations.

All of this is only to say that we tend to blow ourselves bubbles, and then when the bubbles burst as they must we respond by blaming those who had warned us of the fragility of the bubble at the moment of its prime. This blame is irrational, and since what we need most from an economy is an evenness of rotation, an end to the boom-bust nonsense, we must resist our impulses. We need to celebrate the bears.

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