Tag: Fallacies

We all have a tendency to interpret evidence, whatever its nature, as demonstrating the validity of the views we already hold. It requires intellectual magnanimity to acknowledge that additional information might lead us to a different conclusion.

We once suffered from Norman Angell’s “Great Illusion” that prosperity was the product of aggressive control of territory and resources — and now we know better. The wealth of Denmark is instead built on exporting bacon and drugs to control diabetes — an appropriate combination — around the world.

Since 2008, UK employment has risen substantially and working hours have increased but output has barely grown. To explain this productivity puzzle we must dig into the detail of how aggregate statistics are built up.

We are all subject to confirmation bias — a tendency to find, or interpret, facts to support opinions we already hold. But truthiness is more extreme, occuring when conviction is prized over information.

Our perception that inflation is the normal condition is no more than a reflection of the experience of people alive today. And there is no qualitative difference between an economy in which prices are rising slightly and one in which prices are falling slightly.

The belief that an aggregate of casual opinions provides a better process of value discovery than a flow of informed judgment through close engagement by investors, is an article of faith rather than a matter of empirical evidence.

The days when economic power was acquired by inheriting the mill are long gone. Mr Buffett began his business career as a mill owner, but closed the mills and went into insurance. That is the reality of capital in modern economics.

Price indices are compiled by measuring the changes in the cost of buying a fixed bundle of goods chosen to represent the consumption of an average household. But what the average household buys changes with the arrival of new goods; and with changes in relative prices; as well as with variations – good and bad – in quality

Much of the complexity of modern finance is the result of regulatory arbitrage – avoiding or minimising restrictions by engaging in a transaction with more or less identical effect but more favourable regulatory treatment. Many regulators still cling to the hope that it could be eliminated if only rules were sufficiently extensive and sufficiently carefully prescribed. But this is an illusion.

Whatever initial misconceptions spin doctors may promote, reality will out.