Let us suppose a fantasy world in which we could sit down in a game of chance with a select group of opponents. The other players had the following characteristics:

• They are drawn randomly from the population. If you think you are smart, they are less smart.
• They have little education in the relevant subject. You have an advanced degree, and they either did not take or do not remember Course 101.
• The opponents have no theoretical or conceptual model — and probably do not understand what that means.
• The opponents are willing to make big bets on their opinions.

Please keep the scenario in mind.

Ritholtz Bets on the Masses

Over at The Big Picture Barry Ritholtz offers the rather astounding suggestion that when all of the experts in a field agree, it is time to take the other side. Here is a key quote:

As someone who has been skeptical about the artificially low
inflation and unemployment rates for quite sometime now, the public’s
reaction makes a whole lot of sense. If we believe the negative
sentiment of the American people, then its likely that Inflation has
been much more pervasive than reported by either the top line or the
core. And the same thinking likely applies to the low unemployment
rate. If we judge by sentiment, perhaps its not as low as advertised.
Ignoring widespread distress in the population is a recipe for major
electoral changes.

Does this really make sense? Should an investor take action based upon public perceptions of economic statistics — throwing out the opinions of experts?

The Public in Action

To consider the wisdom of betting on the public, let us consider their track record. We’ll have more to say about this in future articles, but for now let us go to a source highlighted by Barry, Michael Shermer. (We could cite our past articles on the blunders by individual investors, but for today, let us stick with Barry.)

In Shermer’s book, Why People Believe Weird Things: Pseudoscience, Superstition, and Other Confusions of Our Time, the author, the editor of Skeptic, (now on our list of featured readings) writes as follows:

If we are living in the Age of Science, then why do so many pseudo-scientific and non-scientific beliefs abound?…New Age ideas and nonsense of all sorts have penetrated every nook and cranny of both popular and high culture.

He goes on to cite a Gallup poll showing that 52% believe in Astrology, 46% in ESP, 19% in witches, 22% that aliens have landed on earth, 41% that humans and dinosaurs lived simultaneously, 65% belief in Noah’s flood, and 67% who have had a psychic experience. 42% think they communicate with the dead.

Shall we bet with the public?

Real Life Applications

One application we know about is the world of tournament bridge, where those who have a sound theory and understand odds routinely beat those who do not. We suppose this is the same in mind sports like chess.

Another application is poker, where the popular conception loses to the expert on a daily basis. The expert welcomes those with little background or knowledge.

In other casino games, they send a limo for those with a “system.”

Is economics different?

What about the Economy? And the stock market?

How should we interpret economic data? Shermer has a useful suggestion:

Science is progressive because its paradigms depend upon the cumulative knowledge gained through experimentation, corroboration, and falsification.

The key point is that real scientists reveal their theories and data, inviting the criticism and tests of others. Anyone not offering findings for peer review and analysis is suspect.

The pseudo-science of those criticizing economic data relies on sources that have no peer review. It is something to think about.

Our Take

There are several easy ways of pandering to public perceptions about the economy, government actions, and stocks.

• Those who have no real economic credentials gain from disparaging those who do.

• Those who have never actually developed econometric models — or any models — gain from acting as if these models have no value.

• Those who have no government experience gain from simplistic interpretations (That is a model!).

• Those who start with a world view, and then criticize any inconsistent data, can find support for that perception.

The stock market offers the chance for those who can identify the real experts to make easy money. Most often, this happens when sentiment is at a bullish or bearish extreme, not supported by reality.

One of our missions is to identify such points. For now, there is a key question:

When experts and the general public disagree, how do you vote — with your money?

Send the limo. (More later — a lot more.)

(Regular readers will note our current model-based bearish stance. We write both about fundamentals and current prospects. Often the sentiment diverges from our sense of opportunity. Our trading reflects the differing time frames).