Reasons to believe in hedge funds – or fairies


The process by which large numbers of people become convinced of things that are not true has always been an important feature of political and economic life. Believing in Santa Claus is part of the joy of Christmas – but fantasies about great returns on hedge funds or unprecedented commercial opportunities of the internet is a different story.

In Tom Hanks’s Polar Express, only those who believe in Father Christmas can hear the ringing of his bell. At the many centenary performances of Peter Pan, audiences must keep Tinkerbell alive by reassuring her, or at least each other, that they believe in fairies. We are exposing our children to complex ideas about the relationship between truth and belief.

“It doesn’t matter where the train is going. What matters is deciding to get on,” says the conductor of the Polar Express. I am not sure that Mr Hanks is right about that. Childish fantasies are innocuous, part of the joy of Christmas and of life. Adult fantasies are more dangerous.

The process by which large numbers of people become convinced of things that are not true has always been an important feature of political and economic life. But never more than recently.

The internet would create commercial opportunities of unprecedented scale and range, Saddam Hussein possessed an arsenal of weapons of mass destruction: these delusions have been central to the economic and political development of the past decade. We now know these assertions are false. Many people have yet to discover that their beliefs that deficits do not matter, and that thousands of hedge fund managers can successfully conjure returns from thin air, have the same status as the expectation that Santa Claus will be coming down the chimney on Friday night.

The social life of a dissenter is always difficult. Few adults give an honest answer when Peter Pan asks if they believe in fairies. The only negatives come from precocious children who have learnt to think for themselves but have not acquired social skills; I can still remember being silenced by my parents and shunned by the audience. With maturity, most of us learn that it is wiser to go along with the crowd.

And with reason. What is widely believed is usually true. That is why it is not just more congenial, but also more efficient to adopt the conventional view than to engage in original research. I think the earth is round, not because I have personally verified it, but because many people I trust tell me so. A thousand years ago, I would have thought it was flat, for the same reason. Likewise, I believed in Santa Claus because my parents told me so, and I ceased to believe in him when my teenage cousin and his friends disabused me.

These social and economic pressures mean that beliefs are contagious. And consequently a proposition that originates with very few people can sometimes become the conventional wisdom.

Take the widespread concern that climate change is a serious problem, the close consensus among economic forecasters and the unanimous agreement that European demography faces a crisis in 2050. All these widely held views become less persuasive when you realise how small is the number of genuinely independent sources on which the supporters of these positions rely.

But the strongest force driving us towards false opinions is the natural human desire to believe what we want to believe. If the choice is between declaring your belief in fairies and watching Tinkerbell fade from view, who would not shout that they believe in fairies? If you must choose between the claim that the internet will change everything and the observation that it is entertaining, a useful research tool and a powerful vehicle for classified advertising, only the most curmudgeonly would not vote for transformation. And who would not like to believe in Santa Claus? Or hedge funds?

Economists define adulthood as the moment at which your expenditure on Christmas presents first exceeds the value of the gifts you can expect to receive. Along with this depressing feature of maturity come ceasing to believe what you want to believe, learning when to ask questions and when to take the views of others on trust, and resisting pressures to conform to what other people think. (I am not sure about the last of these.)

But Christmas offers a few days in which we can all retreat to childish fantasies. As we ride the Polar Express and watch The Sound of Music, we have a chance to believe that all is as we would like to it to be. A Happy Christmas to all readers.

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