It’s a Small World (of Illusion) After All!
I just returned from a family vacation in Disneyworld.
As you might imagine, returning from a fantasy land filled with amazement, consumption, blissful illusion, and other happiness-stretching experiences, I received more than the usual number of greetings from friends, family and colleagues at home – the same kind of welcome home greeting you’ve probably heard before: “Well I guess it’s back to reality for you now, isn’t it?”
I smiled and politely nodded my head in agreement while thinking to myself that I am not returning to reality – I’m simply returning to a different form of illusion!
“Art has a double face, of expression and illusion, just like science has a double face: the reality of error and the phantom of truth.” ~ Publilius Syrus
When Barry invited me to contribute a blog post this week, I thought it might be fun to think of the many forms of illusion we all frequently experience in our broad world of finance and economics. I’ll contribute a few of my own observations and perhaps you could add some of your own.
Financial Plans: This may be unexpected coming from a CFP but financial plans, in general, are highly illusory in nature. The conventional planner gives the client exactly what the client (or what the client’s brain) wants – a neat and attractive package containing graphical displays and supporting data that illustrate the quickest monetary movement from point A to point B – in other words, unrealistic shortcuts. Most financial planning software still have default annualized returns of higher than 10%, which is simply an irresponsible assumption to make, to put it lightly.
The shortest distance between two points is not a straight line (except in geometry and the human brain)! As you might have guessed, I do not use financial planning software!
Heuristics: On the subject of illusions and brains, your brain is wired for pattern recognition, which is why the vast majority of investors are fooled by randomness. A common example here is the Gambler’s Fallacy: If a coin is tossed 5 times and lands on heads on each toss, the gambler will most likely bet on heads for the next toss, even though the odds remain 50 percent that it will land on tails and the results of the next toss are completely unrelated to that of the previous one.
In my humble opinion, the fundamental cause of this financial crisis is heuristics. The core deadly assumption, based upon pattern recognition, made on all sides of finance preceding the crisis included the assumption that home values and personal income would continue rising in perpetuity. This heuristic illusion enabled federal deregulation, irresponsible lending practices, the purchase of exotic home mortgages, the repackaging of questionable loans into investments, and the rise of Credit Default Swaps. You know the rest of the story…
Confirmation Bias: This brings illusion back to the individual (you), which is often the source of the illusion. Yes, you even trick yourself! Confirmation bias occurs when you primarily seek out and select only the information that reinforces your existing attitudes. These biases are largely based upon pre-conceived notions. This behavior is irrational because the careful comparison of data that disagrees with a given bias is rarely if ever sought, making for a poor data set for forming a hypothesis. For example, if you believe stock prices are due for a large correction, you will seek out information that agrees with (or confirms) this notion and you will ignore all other information.
The media: Most readers here do not need to be made aware of the illusion that the media presents.
Mainstream media, especially, is simply in the business of selling advertising – they are not in the business of providing useful information. To sell advertising, headlines are created to steal attention and push readers’ emotional buttons. This relates to confirmation bias (above). Have you ever cited a mainstream media source to confirm your own bias? This might combine for layer upon layer of illusion.
Wealth: The current financial crisis has certainly pulled the curtain down on much of this illusion. Even if a person has a negative net worth or is even a breath away from bankruptcy, they can still appear wealthy. Ironically, this diminishes the value of material wealth. Driving a Lexus, wearing designer clothes and living in a large home does not, by default, correlate with positive financial wealth.
“Truly it is an evil to be full of faults; but it is a still greater evil to be full of them and to be unwilling to recognize them, since that is to add the further fault of a voluntary illusion.” ~ Blaise Pascal
In summary, illusion is not just visual or optical in nature – it may be considered a distortion of reality, including the understanding (or misunderstanding) of any form of information received by the brain. Because the information available to the brain is rarely complete, it simply fills in the missing spaces, which opens the door to much opportunity for the illusionist to manipulate reality (and the potential peril for those lacking in self-knowledge and mindfulness). Without this awareness, we actually enable the illusion.
Where else have you found illusion? Is everything illusory to some degree? Certainly a prudent-minded person would not walk around with paranoid delusions of being tricked everywhere they turn; but is it not responsible to at least be mindful of the tactics and biases of every source of information that we consume?
I’m already wishing I was back in Disneyworld where at least the illusions are honest!
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Kent Thune is blog author of The Financial Philosopher
November 3rd, 2009 at 5:20 pm
don’t be fooled by the radio
The tv or the magazines
They show you photographs of how your life should be
But they’re just someone else’s fantasy…
So if you think your life is complete confusion
Because you never win the game
Just remember that its a grand illusion
And deep inside were all the same.
Were all the same… –Styx
I recommend reading Robert Cialdini’s “Influence: The Psychology of Persuasion”, but it sounds like you have. ;^)
November 3rd, 2009 at 5:24 pm
Kent,
I advise my clients and prospects to understand how people with whom they might do business, including me, get paid. Understanding this sometimes removes the illusion of having another’ sbest interests in mind.
November 3rd, 2009 at 5:31 pm
Kent writes:
“In summary, illusion is not just visual or optical in nature – it may be considered a distortion of reality, including the understanding (or misunderstanding) of any form of information received by the brain. Because the information available to the brain is rarely complete, it simply fills in the missing spaces, which opens the door to much opportunity for the illusionist to manipulate reality (and the potential peril for those lacking in self-knowledge and mindfulness). Without this awareness, we actually enable the illusion.”
To take what you write a step further, perception becomes distorted, by definition, as soon as the intellect kicks in. And, of course, desire is at the root of all illusion.
November 3rd, 2009 at 5:36 pm
This is well said. Unfortunately it seems as though the illusions pervades all the way to those who control the public purse.
November 3rd, 2009 at 5:36 pm
This is well said. Unfortunately it seems as though the illusions pervades all the way to those who control the public purse.
November 3rd, 2009 at 5:43 pm
Wall street loves the performance illusion provided by inflation.
If your investment goal is 8% – and inflation is 3% – then inflation gets the investment managers almost half way to their goal.
Gordo
November 3rd, 2009 at 5:48 pm
Illusions are simply another form of Beliefs. Like the Resurrection, Transubstantiation, Lazarus, parting of the Red Sea, etc.
But beliefs are omnipotent. They have always triumphed over reality, to date. Witness the Taliban, the Christian Right, the Crusades, and current beliefs, in spite of his willful failures, that TheBamster’s constituents have in him.
Without Deniability, the world it seems cannot function.
Goldman Sucks should be able to securitize belie……..oh wait.
November 3rd, 2009 at 6:08 pm
So what are the true rich going to be doing to differentiate themselves from the wannabes?
November 3rd, 2009 at 6:09 pm
Unfortunately, I interpreted your first example of illusions – financial planning – as yet another condescending put down of CFPs. However, you qualifed your comment with conventional – so may be you aren’t talking about me.
I have yet to prepare a plan showing consistent 10% annual returns for anyone.
I’m reading “your money & your brain” which I believe describes some of the illusions you are talking about.
I so want to vent about being marketed to incessantly and the client I fired yesterday – but I’m a really a lurker and probably shouldn’t bore you all with the detail. I lurk to reinforce, or challenge!, my confirmation biases.
Barry’s link to the WSJ article on the math of losses came in handy when I fired the client. But of course it was really just another example of me finding something to confirm my bias that I had done a good job for her.
November 3rd, 2009 at 6:26 pm
Should it be called “illusion” or “delusion”?
We could survive without food and water for longer than we could survive without rationalization.
But is there some independent “truth” even out there? Are not all so-called “truths” based on the view-point of the observer? Is there really anything that is independently real?
Perhaps illusions are just innocent projections of our rationalizations about the state of our world, yet delusions are nefarious attempts by others to deceive us of the true nature of reality.
In other words, we all live in something of an illusory world of our own making, because we somewhat have to in order to survive. But the reality presented to us by, e.g., private and government financiers represents a delusion that serves to benefit them at our expense, and that’s why it is so vile.
The illusion that there is some cosmic purpose to enduring the pain and fustration of day to day life is, for many folks, necessary. Delusions propagated by others just make the pains and fustrations more difficult to rationalize.
November 3rd, 2009 at 6:38 pm
“…Driving a Lexus, wearing designer clothes and living in a large home does not, by default, correlate with positive financial wealth…”
These status symbols either do, or do not correlate with a positive net worth. The default scenario is the scenario. An r-squared exists, it will give you a statistical understanding of the correlation. In other words, those status symbols may correlate with positive financial wealth. In fact, I’d bet they do.
Now, they might not correlate with financial wealth of certain specific, high ranges, but an r-squared exists for them too.
November 3rd, 2009 at 6:42 pm
I have come to the conclusion that we are delusional about spreading democracy and freedom, but are in reality laying the groundwork for the creation of the Death Star.
November 3rd, 2009 at 6:43 pm
OK, the question was about specific illusions, so here’s a list from the top of my head:
The War on Terror
This country elected a President who promised “change” but has continued torture, detentions, renditions, and two illegal wars.
The 9/11 Official Story
Bin Laden was our #1 man in Central Asia through CIA, Pak intel, and the BCCI, all throughout the 80’s. Even the FBI says he’s not on the Most Wanted list for 9/11, because there isn’t enough evidence. The 9/11 Commission was a joke. So to the last commenter, I say, No, it’s not all in the eye of the beholder, do your homework, eat your vegetables, and you realize that you are smart enough to see that the dominant myth of our time is just that, an elaborate illusion.
The Lone Gunman Theory
JFK, RFK, and MLK, all were heroes, all felled by crazy “lone gunmen” who had a quick and shoddy data set of evidence cobbled together to “prove” their guilt. But at my last company, I published Captain Brad Ayers, who was inside DOD and CIA, and knows that CIA’s Gordon Campbell and David Morales were involved in the JFK hit, and then were not only involved, but were present at the RFK hit in ‘68.
The Federal Reserve
Why buy money from a private banking institution when we could mint our own? Isn’t that the power that our “Federal” government is given in the Constitution. (Hint: Answer is yes.) Barry R. makes reference to this, all too quickly, in his excellent book Bailout Nation.
I could go on. I guess in sum, this country is addicted to illusions. All of these illusions seem to feed a bigger illusion, our addiction to violence, to war, to defense spending. Only a major seismic shift is going to change things. Thankfully, that shift is coming. Let’s shape it. Let’s envision a better world and go out and do the work.
November 3rd, 2009 at 6:54 pm
The truest rule I’ve learned to live by. Rule #1 “No one does ANYTHING that doesn’t benefit himself.” So far I’ve yet to find an exception to this rule. Even if you give up something significant, it is because you are looking for something more significant as your values have changed. I’m one of those severely F’d up folks, I’m an engineer (science), CFP (science with a heavy touch of art), and a hint of psychology (art) and realism (WTF?). BR is one of the few people left in the media world that doesn’t subscribe to the heavy marketing theme. Everything from algorithms that automatically skew billet position, to click through advertising. Age of internet, it’s all an illusion that is self fulfilling by the people that visit. The top billet articles get the most clicks (which is why they are top billet) which represents one of two things: The best headline for sentiment, or the confirmation bias. When given a choice of only two things, you will undoubtedly choose the one that benefits you the most. Humans are greedy bastards, Rule #2.
November 3rd, 2009 at 7:13 pm
Kent Thune,
Read your interesting post…but it seemed you “wimped out at the end” as to the REAL conclusions you got out of your Disney Visit.
I wish you had gone more into the personal…(where it is today) rather than “drifting off” into “algorithmic and jargonish spew.
I loved reading it …although the “hype” was more than the “meat” of the article. Hope to hear more from you because your lede was a big HOOK that got me.
November 3rd, 2009 at 8:14 pm
TakBako4:
It’s interesting that you wanted more of my “conclusions” from my Disney visit. I actually edited out several sentences detailing many of my observations from Disney and some of the conclusions drawn.
One observation of Disney I thought was interesting came the night I watched the “Wishes” fireworks display in the Magic Kingdom, which may be the most fantastic and most thought-out display of fireworks in the world. Perhaps it was the immense draw to remain in an “illusion” or perhaps it was the irresistable pull from the brain’s frontal lobe to constantly think of the future; but half of the crowd missed the fireworks display because their eyes were glued to their own camcorder, iPhone, cell phone camera or some other recording device.
I’m all for recording magical moments for posterity but there is no way that any recording device could match the intensity of experiencing the event with the naked eye. So many people seemed to be in a hurry to capture the magic with a camera or to get to the next ride that they missed the opportunity to simply “be there” in the present moment.
I often would sit on a bench and just watch people and soak in the environment. I’d rather recall the “real thing” in my mind than see something that pales in comparison later.
Thanks for the comment…
Kent
November 3rd, 2009 at 8:42 pm
Ahh….this was what I wanted to hear. Because wherever we go today…we are picking up the nuances from the crowd. We wonder if we are separate from the technology….if we can tune out and see the MAGIC that still is around us if we open ourselves to it and allow our children to “tune out” and just “BE.’
Or do we compromise with the technology… (checking our I-Phones or Blackberries) while we display to our kids how we “experience the fantasy.)
Thank you for your reply.. I think you are trying to grapple with what we all are these days. That you say the disconnects…. Well… it was good. How do we deal with all of this that we try to show our kids…and yet the reality of what they grow up with will outweigh much.
Anyway…I hear ‘ya.
And thanks for your reply. As a “benchwatcher myself”….I understand …in these times…maybe one can’t make a living with observations of that..if it doesn’t have monetary value.
But…good to know that your perspective of that (soak in the environment from park bench) center is there….we are all trying to balance that..OH MAN…it AIN’T EASY! Those views from the Park Bench often prove to be more real…than the other crap out there we slog ourselves through.
Anyway…it was an interesting post and glad for Barry that he has buddies who post that cause us to push further in our minds…in these times.
November 3rd, 2009 at 8:56 pm
@Kent: To your point, I attended a friend’s wedding this past year and my wife and I thought they spent far more time taking pictures and trying to “capture the moment” (IMO, we hardly saw them, it seemed) instead of LIVING the moment. It was all a bit strange.
November 3rd, 2009 at 9:23 pm
VennData Says:
November 3rd, 2009 at 6:38 pm
“…Driving a Lexus, wearing designer clothes and living in a large home does not, by default, correlate with positive financial wealth…”
These status symbols either do, or do not correlate with a positive net worth. The default scenario is the scenario. An r-squared exists, it will give you a statistical understanding of the correlation. In other words, those status symbols may correlate with positive financial wealth. In fact, I’d bet they do.
Now, they might not correlate with financial wealth of certain specific, high ranges, but an r-squared exists for them too.
——————
Is Kids “living within themselves” a new phenomenon….?
At this level, I feel it differs from what I grew up with where we also “lived within oursleves” but had some family members who violently rebelled and restricted us and told us to go OUT THERE AND GET SOME AIR in the REAL WORLD.”
I wonder how that goes. It’s difficult to do that today. If I had had free reign to “Face Book” or “My Space” being a “quiet sort” I might have made my own reality in those Forums and never sought out anything different.
In my day…it was the Public Library…to get away…these days…it’s going on vacations or out to social occasions with Mom and Dad where the I-Phone/Game Phone is ever present. Dinners are punctuated with “clicking sounds of texting” and the SELF IDENTITY is the way to be noticed in a shrinking people/personhood environment.
What’s good is that geekies can connect with fellow geeks and the Poker Players/Traders can connect with their own…and so it keeps the interaction down in human discourse and discontent in the Middle Schools and High Schools.
One can walk around perfectly content in one’s own “Virtual Community” and AT LAST never have to deal with the others. Yet it does seem that suicides and teen depression is on the rise… But, that also means that those who have the MONEY from PARENTS to have ACCESS to VIRTUAL WORLDS will be able to find their own VIRTUAL WORLD…and the poor will be left to Prison or Drugs to deal.
Well…I don’t want to be gloomy or too simplistic here with my hyperbole. But, truly…I do worry about the ability of the kids who have access to Face Book and My Space having a healthier life than those who have no outlet but the reality of their daily contact…face to face with their peers…and how THEY DEAL.
It’s something we need to think about as a society. How “Our Kids” (folks on this site) cope as opposed to those who have nothing. And, by nothing…..meaning no untamned wilderness….new vistas to explore beyond the apartment in Urban Lifestyles and the ever growing CONTIANMENT of the Surburban/Ex-URBAN new GHETTOS where kids are confined from EXPLORATION of our earth.
The parents with Lawn Services where the kids don’t rake leaves for parents or earn extra money raking leaves for neighbors. (No ties to the land when the “Lawn Service” comes once a week and does the job) and where those “high tech” swing sets complete with the “Tented Forts” (the stuff we oldies used to build out of cardboard boxes or scrap wood in back yards years ago) go unused after parents forked out money for them and the kids turned cold “fish eye” because they’d rather be “gaming” with the newest tech toys.
Who knows where this all goes. Perhaps we only need to experience nature and building with tech innovation inside our bedroom walls. Perhaps VIRTUAL is really the way civilization is going and to be a Luddite is to say Fresh Air and “Build it out of REAL CAST OFFS” is the challenge for creative thinking that kids have always used to learn to get ahead and get some “space” away from Parents…that all kids really want for some times in their life.
Or, is it better to be sitting and gaming or building or innovating with your I-Phone or other Device while at Grandma and Granpa’s for Thanksgiving Dinner? One could go through the whole boring thing while finding new and creative things to do “clicking away.”
Maybe it’s just the best new thing…and going to Disney or the rest…is just a great distraction from kids who have a different direction these days?
As I said…who knows? Lot’s of new things going on…sifting and sorting…
November 4th, 2009 at 1:08 am
“The core deadly assumption, based upon pattern recognition, made on all sides of finance preceding the crisis included the assumption that home values and personal income would continue rising in perpetuity.”
I don’t think so. It was simply another form of Momentum Trading and most momo players are fully aware that trends don’t last forever.
November 4th, 2009 at 6:11 am
@Clem:
Apparently this quant didn’t get the memo:
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
November 4th, 2009 at 8:22 am
@ Venndata:
I barely scraped by with a ‘C’ in grad school statistics! Also, blog writers certainly can use a good editor! I believe I could have used a better word than “correlate” in context. Perhaps “translate” would have been a better word?
@ Clem:
I agree with your comment but I would guess that most momentum players ACTED as if home values and personal income would continue rising in perpetuity.
Similarly, it is reasonable to assume that we all know that we will die; however, most of us ACT as if we will live forever or at least that our death day is far into the distance when it is possible that death can come this very day.
@TakBoko4:
To add to your comment about kids and their parents, I also observed a teenage boy in Disney quickly walking with his father (apparently on their way to the next ride). The boy was watching a movie on his father’s iPhone. The father turned to the boy and said, “Turn off that movie! You’re wasting my battery!”
I quickly thought two things: 1) The boy is missing the greater experience — the present moment in one of the most magical places on earth. 2) The father was not concerned that his boy is disengaged with life by playing with gadgets but only that his iPhone battery might run out while in the park!
I didn’t carry my phone or even a watch in Disney.
Thanks to all for the comments and to Barry for inviting me to write this post!
Cheers…
Kent @ The Financial Philosopher
November 4th, 2009 at 9:22 am
I had promised my wife I would go on a cruise one day, so I did.
I guess Disney is similar, such perfect pleasantness and plastic magical decorations; it made me uncomfortable and wonder if this is the future of society.
There is nothing in humanity you can’t hide behind a good layer of materialism or fanaticism, whether it is the third worlder smiling and joking while he’s serving you diner or the dead 20 year old wrapped up in a flag, illusion rules.