The Sovereign Debt Crisis and Confirmation Bias
The Misconception: Your opinions are the result of years of rational, objective analysis.
The Truth: Your opinions are the result of years of paying attention to information which confirmed what you believed while ignoring information which challenged your preconceived notions.
–Confirmation Bias, You Are Not So Smart
The last time I mentioned this topic was when I was explaining that researchers have postulated that "reasoning was not designed to pursue the truth. Reasoning was designed by evolution to help us win arguments." So its not about the "facts" per se but rather positioning the facts in a light that advances your own agenda or ideas.
I was thinking about this yesterday in the context of the post Marc Chandler wrote on Greeks working 48% more hours than Germans. Here’s how I put it on Twitter yesterday:
- Entrenched debt crisis myths are causing pushback on this: Greek workers work 48% more hours than Germans https://bit.ly/xZYLNa $$
- The pushback on the absolutely true fact that Greeks worker longer hours demonstrates how media misinformation shapes opinion $$
- People develop a view based on accumulated data points and anything that counters that view is questioned or even rejected
- When the media push out slanted or factually incorrect information, people who do not dig deeper are fooled
- MUST READ: When your deepest convictions are challenged by contradictory evidence, your beliefs get stronger. https://bit.ly/AF0hnP$$
That last Tweet is an interesting one. Here’s what the article says:
When you read a negative comment, when someone shits on what you love, when your beliefs are challenged, you pore over the data, picking it apart, searching for weakness. The cognitive dissonance locks up the gears of your mind until you deal with it. In the process you form more neural connections, build new memories and put out effort – once you finally move on, your original convictions are stronger than ever.
–The Backfire Effect, You Are Not So Smart
When it comes to the economy, there are still a lot of people who are not committed to a particular worldview and are, therefore, open to considering different ideas. I usually try to be one of those people. But the major figures in the world of economics and finance have years of experience and knowledge telling them that "when someone shits on what you love, when your beliefs are challenged, you pore over the data, picking it apart, searching for weakness." That’s what has been going on in the blogosphere.
I get tired of these same old arguments — especially when I know they are not going to change anything. People will crawl into their corners and try to figure out how they can win the rhetorical argument, facts be damned. That’s how people operate in real life and that’s how the operate on the Internet too. So you won’t see me getting into ideological pissing matches. It’s hopeless and a waste of time. All I can do is present you what I think is best reflective of a coherent framework on how to judge the macro backdrop in a way that will give you the greatest ability to anticipate what is going to happen next in this difficult investing, business and economic climate. Sometimes I’ll get it wrong but usually I have got it right (so far).
When I was talking about the backfire effect last year I said that "pendulum swings in policy and ideology are a product of people without conviction on issues taking sides. In today’s context, political and ideological battle lines will harden. Eventually, someone will win these policy battles and policy will tilt one way. Afterwards, one side or the other will be proved right by events." But not everyone will believe that events proved anything. The backfire effect will be too strong. That’s just how it is going to have to be.
As for the Greek situation, a lot of people find it hard to believe that ‘lazy’ Greeks work longer hours than ‘hard-working’ Germans, having been so brainwashed by propaganda. What these people prefer to believe is that the Greeks doctored the numbers, just as they did the debt and deficit numbers to get into the euro zone.
But again, it goes to a specific world view: Greeks are cheating, lazy tax dodgers who run up debts that they can’t pay and probably have no intention of paying. The same goes for Italians and Spaniards. Germans on the other hand are industrious, forthright Europeans paying more than their fare share for the free riders while still maintaining their own fiscal probity.
We have shown this picture of Europe to be inaccurate many different times. How many times do we have to revisit this theme? Don’t the numbers speak for themselves? I think you know the answer — they don’t if they don’t agree with one’s pre-conceived ideas.
My view here: what the data say about productivity and industrial policy is a lot more important than the number of hours worked. The Greeks need to increase productivity and that means making drastic changes to their industrial organisation. What those changes are is a topic in and of itself.
Moreover, in Germany, Japan and Switzerland, the currencies have appreciated sharply during the past 40 years. I would argue it is because of this that their industries have been forced to move up the curve in manufacturing toward more value-added manufacturing. The point being that a weak currency allows lower productivity companies that would be forced out of the market or forced to gain productivity to continue in business. So the currency can have a lot to do with this in my view.
The myth that Greeks are lazy and Germans are industrious and that this has some significance in the sovereign debt crisis is everywhere one turns. It is false. The issues for Greece are not about working longer hours but are ones of productivity, industrial organisation, and demographics. That won’t stop people from spinning the tales of lazy Greeks and workaholic Germans. People will believe whatever they want to believe based on their world view and presenting facts that challenge that view is only going to make these people dig in deeper into that view.
My prediction: As the sovereign debt crisis deteriorates, it is these kinds of world view conflicts which will make nationalism a very potent force to deal with.
P.S. – Last night, a friend from college turned me on to the You Are Not So Smart book. I am reading it now. Highly recommended.