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My Sunday Washington Post Business column is out. This morning, we look at the pernicious staying power of bad ideas.

The print version had the full headline Zombie ideas: Why don’t bad notions ever die? while the  online version is the simpler: Why don’t bad ideas ever die?

Here’s an excerpt from the column:

“This time of year is filled with retrospectives and “best of” lists. I’d prefer a more enlightened discussion about bad ideas. Or rather, zombie ideas: the memes, theories and policies that refuse to die, despite their obvious failings.

Why do we embrace the terrible, fall in love with the wrong, bet money on the fictitious? Nowhere is this truer than in the fields of economics and investing. Together they have produced a long list of thoroughly debunked ideas.

Despite this, many of these zombie ideas still have a vice grip on amateurs and professionals alike. What is it about us and this intellectual voodoo? We keep repeating the same mistakes over and over. It is maddening. Let’s count the ways…”

I really like what the Post did in the dead tree version of the paper — the above paragraph is in huge type, with the bad ideas (below) mostly on the left side of the page and the explanations on the opposite other. I’ll see if I can get a good snap of it (the eReader the Post uses produces terrible graphics).

The bad ideas discussed include:

1 Shareholder value
2 Homo economicus
3 Economics as a science
4 Austerity
5 Tax cuts pay for themselves (supply-side economics)
6 The efficient-market hypothesis
7 Markets can self-regulate
8 Gurus, shamans and prognosticators

And the general explanations for our all too human failings include:

•  Fooled by randomness (a.k.a. luck)
•  Greed and sloth
•  Institutional mandates
•  Status quo
•  Narratives persuade more than data
•  Incompetency
•  Bias
• Darwinism works slowly

 

Source:
Why don’t bad ideas ever die?
Barry Ritholtz
Washington Post, December 16 2012  
http://www.washingtonpost.com/business/why-dont-bad-ideas-ever-die/2012/12/13/919ded36-4475-11e2-8061-253bccfc7532_story.html

Category: Investing, Philosophy, Psychology, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “The Pernicious Staying Power of Really Bad Ideas”

  1. constantnormal says:

    It isn’t just that Darwinism works slowly … some bad ideas are immediately fatal to those who adopt them, and those ideas never spread very far … it is the indirect chains of consequence that account for the longevity of bad ideas, with the wielders typically achieving some benefit from their “genius”, at the cost of building a growing body of victims, who eventually act to remove the source of their pains … and who all too often, then adopt the same bad memes, inflicting pain on another group of victims, until the cycle inevitably repeats.

    Learning the correct lesson from a mistake is usually not the human way, we tend to all be Americans in this regard, trying every wrong answer before finally arriving at the correct one … (hat tip to Winston Churchill) …

  2. constantnormal says:

    @BR “… Shareholders derive much less value than the name implies”

    Do you see this as a short-term effect, with shareholder value having some merit over the long haul (and if so, just how long of a haul are we talking about)? Supporting examples of your answer would be appreciated.

    ~~~

    BR: The Shareholder Value movement traces back three decades.

  3. mysterious eggs says:

    3 “Economics as a science” is a joke. And this is coming from someone with Econometrics MS who uses that stuff daily. It’s like sitting in a Geo Metro going 120mph and believing that everything is functioning within it’s operating window to the same degree it was when you were going 40mph. Tap those brakes, bro. If you made it that far through academia or learning by actually doing something in the real world and still don’t understand that you’re accumulating more knowledge about what *doesn’t* work rather than what *does* work then have fun hanging out with 1 , 2, 4, 5, 6, 7, 8, and probably sadly more Horizons, Fukushimas, and bailouts.

    Our conclusion is 100% guaranteed to work as long as none of our false assumptions are broken.™

  4. Matt P. says:

    Is that section on EMH serious? Listing 5 guys out of 50,000 (or however many have managed money over the last 50 years) is proof of nothing. We both know that 7 years ago Bill Miller would have been on your list as well. Barry you know better than this.

    ~~~

    BR: Thats the standard EMH answer:

    Because statistically speaking SOMEONE is going to outperford, EMH conclusion is therefore anyone who outpeforms must have done so due to pure luck.

    The conclusion does not automatically follow the initial assumption, except in EMH it is a definitional issue — since no one can outperform, it must therefor always be due to chance.

    Asked a different way: What test could an EMH proponent use to verify (or disprove) the tenants of EMH?

  5. denim says:

    Barry, you posted this BBC doc on Bernays’ public opinion manipulation techniques.
    http://thoughtmaybe.com/the-century-of-the-self/#top
    At about 58 minutes, the underlying Bernaysian philosophy begins to unfold. His groupies believe that democracy is to be faked by clever ads and the public’s opinion manipulated to suit the elite’s mindset. A little creative mendacity is just part of the technique and repetition of a lie makes it more believable to their targeted suckers. Their zombie ideas don’t die…they are resurrected as needed. Creating hysteria and uncertainty is a feature of their manipulation techniques. Focus groups test this out for them

    http://www.voxeu.org/article/hysterical-economy
    http://www.voxeu.org/article/economic-recovery-and-policy-uncertainty-us
    Are you feeling hysterical? How about a little uncertain?

  6. Mark Thomson says:

    You conclude that economics is not a science. Perhaps a more accurate way to put it is that economists are not scientists. The problem is not that there is no possibility of science being applied to questions of economics, but that there is just not enough of it actually taking place.

    ~~~

    BR: I asserted (not concluded) its not a science, as have others (see EG this, this or this)

  7. Outsider says:

    “Vise” not “vice”, yes? If it’s a play on words, it seems like a stretch. It made it in to the online Post version also, don’t know about the paper copy.

    ~~~

    BR: Vise grip is a registered trade mark, I thought Vise was fine. Not sure why that change was made (Yes, made it to the print edition also).

  8. ToNYC says:

    The No.1 bad idea that refuses to die and claim millions of eyeballs every hour of every day is the idea that there is some real value or thing that we can get reliably for FREE, whether by birth inheritance, tribe, political artifice intrigue. Faith and Hope are not strategies, but Charity works like farming.

  9. Matt P. says:

    Barry your whole EMH section lays out simplistic arguments that have been thoroughly refuted by the literature. The fact that you put it in an article titled “The Pernicious Staying Power of Really Bad Ideas” makes it even worse. If Lynch had real skill why couldn’t he pick a successor? Why couldn’t he do it longer? Why does Buffett argue against picking stocks for virtually everyone. Why does Swensen? I will readily admit that EMH isn’t ironclad like the laws of gravity but as an organizing principle for virtually all investors it is rock solid.

    So to answer you question. Here is an article and a paper. http://www.dimensional.com/famafrench/2009/11/luck-versus-skill-in-mutual-fund-performance-1.html

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021

  10. Matt P.

    I am not following your suggestion that Lynch was supposed to pick a successor.

    Isn’t that a totally different skillset than stock picking?

  11. philipat says:

    I would add to the list “ZIRP and QE” which seem to be the Fed’s equivalent scenario of ideas that don’t work yet won’t go away. I suppose this might fall under “Economics as a (Dismal) science?

    ~~~

    BR: They have yet to be disproven. The counterfactuals are Japan at current and US in 1930s.

  12. Matt P. says:

    Fair point Barry. I was getting a little loose probably but it seems to me if you really have skills that allow you to consistently provide alpha you should be able to select your replacement and/or teach others. Then again, Isiah Thomas is a crappy basketball executive.

    ~~~

    BR: Isiah Thomas makes my exact point — these are two completely different skillsets

  13. Jojo says:

    How about an article on economic myths accepted as fact? For instance:

    - The Republican presumption that lower taxes on the wealthy create jobs and [even slightly] higher taxes on that class would cost America jobs?

    - That small business is the primary job creator in the USA. Most job creation is done by large businesses, not small ones. Here’s a couple of links I posted a couple weeks back on this:

    http://www.nytimes.com/2012/02/25/business/data-challenges-idea-that-small-companies-create-more-jobs.html

    http://www.businessweek.com/magazine/rethinking-the-boosterism-about-small-business-09282011.html

    - etc.

  14. BR,

    nice Article, thought it well done~

    personally, I like these ~4 Reasons..

    ● Status quo: Powerful forces are comfortable with how profitable things are, and they exert tremendous force to keep them that way. Think tanks, academia and corporate consultants create a ready constituency for old, bad ideas on their behalf.

    ● Narratives persuade more than data: A good story is far more persuasive than data. Zombie ideas are modern fairy tales. Comprehending a data series is challenging, requiring skill, intelligence and hard work. A compelling story, on the other hand, can be understood by a child.

    ● Incompetency: Skilled people have a greater understanding of their limitations for a given task; unskilled people do not. This is called the Dunning-Kruger effect, and it tells us that the worse we are at any given talent, the weaker our own meta-cognition about it is.

    ● Bias: Bad ideas often conform to our erroneous world views. Consider the impact of selective perception and confirmation bias — they assuage our egos and are made to fit our prejudices. Bad ideas hang around in part because we seek them out and embrace them.

    though, the first and last could seen as similar..
    ~~~

    @denim

    where did BR post the Bernay’s piece?

    looked at WaPo (was going to be ‘floored’ to see it there..)

  15. medicalcontrarian says:

    Nice narrative. Would benefit from some data. Could your ideas regarding bad ideas suffer from bias? How do you know where you might be wrong? Has Tetlock done an analysis of your prognostication?

  16. medicalcontrarian,

    Most of the week I focus on specific economic data, investments or markets/stocks, there is a universe of data to be analyzed. And that’s what I do.

    On the weekend, I like to do a 30,000 foot really Big Picture overview. This is especially true for the Washington Post, where I try to keep the mathematical analysis to a minimum.

    As to bias, I have addressed that extensively, see this.

    As to prognostications, I try to avoid them. See this

  17. capitalistic says:

    Bad ideas are bad in hindsight, and so are good ideas.

  18. Matt P. says:

    Though to be fair. Warren Buffett is no stock picker. He is a businessman.

  19. dsawy says:

    Your point #3 is abundantly true, and the worst offenders in this matter are the economists at the Fed.

    In reading economics papers from the 1930′s onwards, I notice in recent decades a trend towards highly quantitative models and papers, complete with lots of computer modeling of expected outcomes. In the 1930′s, I see lots more emphasis on identifying linkages, cycles, and human/business behavior. In other words, in the 30′s, we see economics acting as a social science, not even pretending to be a hard science.

    Irving Fisher’s papers on debt deflations, Hy Minksy’s papers on debt, etc – all have very little in the way of math in them, yet more completely and accurately describe what we’re seeing now than all the modern papers with reams of data and highly involved mathematical models.

  20. gkm says:

    This is a disappointing article to me in two senses. One is that it does skewer the heart of economics which was my vocational education – and deservedly. And second, I think it does so as much undeservedly.

    You can quibble about economics as a science, or not, just as you can really quibble about pharmacology as a science or not: it works in theory but each individual application can be slightly or vastly different. Physics has gone through major upheavals like where light was considered to move as a wave and then as a particle and then as both (or maybe the other way around – I don’t know). Issac Newton was an alchemist.

    My point is that economics is what it is. It happens everyday and just because we don’t have a perfect model of it doesn’t change that fact.

    Theories have to be tested and when they fail you start at the beginning again and build from what is proven. You don’t stop trying to understand light or dismiss gravity.

    I will note some of these misunderstandings of economics may be driven by the manipulative function of which George Soros speaks. The market can only work a certain way if it is “said” to work a certain way, because otherwise it couldn’t be effectively managed if the truth were known generally. Sir Newton may have nothing on the alchemy being attempted these days.

    I do think that the truth will be one day be known through the workings of the market regardless of the dark ages we are in currently. Market cycles offer powerful insights into the truth IMHO.

  21. victor says:

    BR: you write:”We keep repeating the same mistakes over and over. It is maddening. Let’s count the ways…”

    Seneca the Younger (4 BC-AD 65) had a phrase for this not uncommon human affliction: “To err is human, but to persist in error is diabolical.” Rings out even better in Latin.

  22. Skeptical says:

    RE: The list of reasons:

    “Fooled by randomness”. I think it’s also the inability to understand and distinguish among :
    * coincidence
    * correlation
    * causality

    Also, can add “lack of perspective”. Quite often we see one month, or one quarter, or one region without realizing that in the bigger picture OR in a closed system, the so-called opportunity is a problem. For example, for individual companies can cut back on spending. But if EVERYBODY cuts back on spending, the economy just spirals downwards.

    Also, “short memory span”. Similar to “not learning from history” or the magical thinking of “this time is different”.

  23. philipat says:

    @Barry, So you are saying that the success of “The Japan model” of ZIRP and QE to Infinity is not yet, after 25 years, any illustration of a ploicy that has failed? You appear to be arguing that The US in the 1930′s is the counterpoint? I would have thought it self-evident that an awful lot of water has gone under the bridge since the 1930′s and that conditions now are somewhat different. Would it not be more relevant to base an economic prognosis more on examples from the last decades? Including other experiences in Iceland, Ireland and Sweden, for instance? Barry, I never understood before that it seems you are, at heart, a dies in the wool Keynsian through and through?? I confess that I, of course, lean more towards the Aust(e)rian approach.

    ~~~

    BR: No, you seem to have gotten everything I said all wrong:

    1) Japan failed to stimulate, and has had decades long recession
    2) 1938 recession was caused by premature austerity
    3) I have no specific affiliation with any school of thought, though I do have lots of respect for Keynes.

  24. microcap says:

    BR- I love the concept, but will suggest one omission and I am going to side with those who disagree with your inclusion of EMH in the list.

    First, I strongly urge the inclusion of executive stock options as a terrible idea that never dies. The idea that they align insiders’ interests with shareholders is a laughable joke at this point.

    On EMH– There’s no doubt that the strongest form of EMH is silly, but that doesn’t invalidate the idea that markets are very efficient. Remember, it doesn’t mean that markets are always RIGHT, just efficient. The concept of low cost indexing in Large U.S. investing flows directly from EMH– a concept I happen to agree with.

  25. In the past, I have observed that Markets are kinda-eventually-sorta-mostly-almost Efficient.

    Where the theory falls apart are the booms and busts that beset markets so regularly. Nasdaq 5100 in March 2000? How about 1100 October 2002? How efficiently priced were they at those two instances?

    I have yet to see a decent explanation that accounts for non rational humans who make up the markets themselves.

  26. [...] interesting comments both here and at the Washington Post as [...]

  27. S Brennan says:

    Good links BR, well worth reading:

    “BR: I asserted (not concluded) its not a science, as have others (see EG this, this or this)”

  28. ToNYC says:

    victor Says:
    Seneca the Younger (4 BC-AD 65) had a phrase for this not uncommon human affliction: “To err is human, but to persist in error is diabolical.” Rings out even better in Latin.

    To err is human with a Learning Curve,
    but to persist in error takes Faith, leavened with arkloads of Hope.
    Latin may ring out better, but mostly it’s the wrong number keeping the Faith working.

  29. Bill Wilson says:

    Does EMH simply imply that you can’t beat the market, or does it mean that markets can be trusted to give you the correct price signal. While I agree that very few people can beat an S&P index fund, I still don’t think that markets are efficient.

    Markets are made up by people, so they are driven by human psychology. How well is human psychology understood? Markets are also a game. How easy is it to predict the behavior of your opponent during a game? Can I make an offensive analogy. It’s a rare occasion that I can predict or understand the behavior of women, does that make their behavior efficient and rational? (Not that I’m any better.)
    If the market is efficient, why did it allow Lehman Brothers and others to leverage up to the point where they could have destroyed our economy. A government regulation limiting leverage would have saved “rational” market participants from themselves.

  30. microcap says:

    Another possible addition to the list is Modern Portfolio Theory BTW…

    ~~~

    BR: Absolutely

  31. I want to play this to some of the comments I have seen here

  32. philipat says:

    @BR “Japan didn’t stimulate”.

    Are you kidding me? Japan has a 250% debt to GDP ratio as a result of massive ongoing stimulation which, demonstarbly, did not work. Japan INVENTED QE. So which arguement does that support? I would continue to maintain that Japan’s problem was the same as the US, that of saving Zombie Banks, instead of letting them fail, firing ALL the Managements, wiping out the Shareholders and Bondholders, saving Depositors, writing off bad debt, re-capitalising and re-floating the Banks with the taxpayer getting the gain, not the Banksters. The alternative model worked well in Sweden and Iceland.

    Regarding Keynes, I agree and I also have repect for his work. The problem is that one of his major theories, that of counter-cyclical Government intervention, has been usurped by the Politicians. Keynes contended that Governments should create reserves during good times, then release those reserves during bad times, in sync with the economic cycle. Which makes perfect sense to me. The problem is that the there is zero chance of any Western Government today creating reserves during the up cycle and the Politicians and Champagne Socialist Economists have re-defined Keynes theory as endless spending.. Keynes must be turning in his grave?

    I appreciate that this debate began with my contention that “QE and ZIRP” should be included in the list of useless ideas that won’t go away for Central Bankers. So the Banking bailout issue is off-topic, but nonetheless relevant as the reason we are debating the QE issue in the first place.

    I suggest that we may need to revisit this topic when we are already on QE7 or 8?

  33. Japan never came anywhere near the US in terms of its post crisis stimulation (dont confuse budget spendign with QE or ZIRP) — they bailed out their banks, and allowed 30 year slow rehabilitation of their balance sheets. It was a case of “Save the banks, the hell with the banking system”

    Indeed, the infamous Bernanke Helicopter speech in 2003 was in part about the mistakes the US made in the 1930s and Japan made in the 1980s &* 90s.

    The election this past weekend was in large part about the deflation in Japan and the failure to reinflate the economy:

    Japan’s Shinzo Abe prepares to print money for the whole world
    “Japan’s incoming leader Shinzo Abe has vowed to ram through full-blown reflation policies to pull his country out of slump and drive down the yen, warning Japan’s central bank not to defy the will of the people.”

    You have this exactly wrong. Stop wallowing in academic theories, and try to pay attention to the actual facts on the ground.

  34. cheese says:

    can’t wait for barry’s next column….. 10 Great ideas that never get instituted and why…………

    neiderhoffer may have been a boob, but, he’s spot on when it comes to these types of premises.

  35. DuchessGateau says:

    Mr Ritholtz,

    You have the patience of a teacher. I was startled by some of the negative comments in WaPo. I thought it was a great, uncontroversial wrap-up. But thank goodness you aren’t subject to student reviews. As I recall, the best professors were often unappreciated, and the masses were unable to distinguish good from bad. Pearls before swine.

    Which leads to an obvious observation about bad ideas: Poor students are unable to distinguish between good and bad ideas, and prefer quick and easy aphorisms. I don’t mean to sound superior, because anyone who doesn’t have time to devote to anything complicated becomes functionally equivalent to a poor student. Smart people fall into that category much of the time, which is why sound bites have mass appeal.

    So the trick is to break things down so people of average intelligence and timespan can understand, which you seem to have taken as your mission. Patient explanation is the best antidote to bad ideas. But you could also take a tip from Bernays yourself, and use sound bites, “idea placement” in TV shows, movies, and editorials, celebrity endorsements, etc. to counter bad ideas. Infowar. It’s used by governments and corporations, and it’s extremely effective. As a star of financial blogdom, you could start with the technology-media conference SXSW…

  36. Thanks for the kind words —

    The emotional pushback is actually reflective of just how much people have personally invested in these bad ideas — they studied them undergraduate then grad school and learned them well (so it becomes part of their sunk costs), it often is part of their industry, so they often are forced to live with bad ideas and they don’t know how to contextualize them, so they cannot fight back against them.

  37. Bill Wilson says:

    I think Keynesian theory is partly true and very important, and partly unproven.
    I believe that our system of automatic stabilizers (food stamps, unemployment benefits, etc..) is very important. It provides a social safety net during recession, and I personally don’t care if it’s good for the economy or not, or that it forces you to run deficits during a recession. I don’t like the idea of people having to eat dog food, or the social instability that occurs when people are desperate. It also helps to raise GDP when GDP is contracting.
    What’s not proven is the idea that the government can “prime the pump” or spend enough for the economy to reach “escape velocity.”

  38. Greg0658 says:

    *Greed and sloth
    another put
    to do as little as possible for as large an income as possible = the _ way (was going to say american – NOT)

    can government “prime the pump” – yes .. but the pov you desire = return cash with profits

    government could turn all this on its head – but folks would scream something other than capitalism is taking over

    cash was invented to force labor (to survive) + cash exists to price precious’es

    now return to 1st line and consider food + energy / population (mix)