Sometime ago, in a presentation, I suggested – only half in jest – that the science of Economics should be disbanded and become a subset of Psychology.
My argument was that economists basically do two things:
- Gather and analyse data; and
- Make predictions based on the data.
They’re quite good at the first, which is to do with the past, creating a picture of what happened, and as a consequence, where we are. But a smart computer program – or maybe even a stupid computer program, come to think of it – could do that bit.
At the second, making predictions, which is to do with the future, (yeah, I know, predictions usually are), and is the bit that really matters, Economists are fairly hopeless.
You won’t be surprised to hear that the members of that profession in my audience did not take kindly to this suggestion. A lynch mob didn’t spontaneously form, and I did escape with my anatomy in one piece.
But it was a close run thing.
So why is it that Economists are such terrible clairvoyants?
There are two reasons.
First, their entire science is built on the idea of a “Rational Market”, i.e. the notion that markets behave logically; that buyers and sellers make sensible, data based decisions when deciding what to buy or sell.
Ever accompanied a female on a clothes buying excursion? Okay, ’nuff said.
The reality is that we all buy for a vast number of reasons, and they’re mostly psychological.
Have you ever bought something completely insane, but by the time you got it home, convinced yourself that it was the smartest business decision you’d ever made?
Right. My point exactly.
The share market is driven, not by rational thinking, but by panic and exuberance, operating in an endless cycle.
The masters of the universe on Wall Street would have us believe that they sit on high, peering into the future, calmly making the decisions that shape our world. What a pile of bovine excrement!
They’re driven by ego, the drug of choice they last ingested, and a desperate need to prove something to their fathers.
There is no such thing as a rational market.
The second reason Economists’ forecasting accuracy is equal to dart throwing is that they believe that there is such a thing as a market in the first place.
Another dose of you know what.
The word ‘market’ is shorthand for what happens as a result of billions of decisions made by people around the world.
Whether to be influenced by that new ad and start eating that fancy new bread; whether to listen to a politician and get suckered into being pessimistic when there’s no reason to be. (Aussies please take note). Whether to raise or lower interest rates if you’re on the RBA Board.
All those decisions made by everyone, everywhere, result in a complex set of numbers. And that set of numbers, boys and girls, is what Economists quaintly refer to as the market.
But it’s nothing more than a snapshot of all those decisions, which are based on…. yeah, thoughts and feelings.
The study of which is known as Psychology.
So, the next time someone talks about predicting where the market’s going, it’s okay to laugh.
Don’t be too unkind, but laugh anyway.
Unless they actually are a psychologist.
Then you might want to pay attention.