Markets & Political Bias

Markets & Political Bias

The United States loves free market capitalism. Almost any political action that would raise taxes, introduce tariffs on foreign goods, or regulate an industry is met with incredible pushback and extreme rhetoric. Most people don’t have a great sense of what communism or socialism really are, but those terms are used extensively whenever the government proposes a new regulation or program that might interfere with a market. Free market capitalism is the heart of the United States, at least in rhetoric.
 
 
However, as Yuval Noah Harari writes in his book Sapiens, “there is simply no such thing as a market free of all political bias.” Markets on their own are not perfect. Clickbait headlines and designed obsolescence of smartphones are two frustrating examples of imperfect markets. In both instances, unequal information and misaligned financial incentives provide motivation for the producer to provide sub-par products. These examples are relatively harmless, but they do contribute to a larger problem within markets – a lack of trust between consumers and producers.
 
 
Harari continues, “the most important economic resource is trust in the future, and this resource is constantly threatened by thieves and charlatans. Markets by themselves offer no protection against fraud, theft, and violence.” Clickbait headlines have made me distrust internet links and headlines that sound juicy. I make it a point to never click on a Yahoo! article after being burned too many times by clickbait headlines when I was younger. I simply don’t trust what appears to be valuable information on the internet – a problem that has larger spillover effects as our population comes to distrust any information. In terms of smartphones, government regulation actually did play a role in changing the problem of designed obsolescence. Apple was deliberately slowing down older devices in an attempt to force users to buy newer devices – Apple claimed they had to slow phones down to prevent battery degradation and damage to the devices (eye roll). The result has been better performance of older smartphones for a longer lifetime.
 
 
“It is the job of political systems to ensure trust by legislating sanctions against cheats and to establish and support … the law.” We make investments and purchase goods when we can trust the market actors and that our investment will payoff in the future. I continue to purchase Apple products because I have seen an improvement in the problems of designed obsolescence and devices failing to function after just a year. Market intervention from the government helped stabilize the market and ensure that consumers had access to better products. However, I still don’t click on many articles, especially if the headline sounds like clickbait. I still don’t have trust in internet information, a space that the government has done little to regulate. The market on its own hasn’t established that trust, and as a result I make deliberate attempts to avoid the market. Free market capitalism, in these two examples, actually seems to work a bit better when there is some regulation and intervention, something that seems to contradict the general idea surrounding markets in the United States.

Limitations of Money: Market Outsiders and Impersonal Systems

Something I have noticed in my own life recently is that I am less patient and less personable with random strangers in stores. My wife and I do most of our grocery shopping on the weekends, but typically each week we have a meal planned that will turn out much better if I pick up a single ingredient the day we cook that meal rather than four or five days ahead of time during our weekend shopping. This means that usually at least once a week (more if I forgot an important item) I am running to the store after work. During these trips I’m usually in a little hurry to pick up what I need, get through the afternoon rush hour traffic quickly, and make my way through the store and everyone else who is at the store after work to get home and start cooking. I know what I want at the store, where it is in the store, and I’m not really interested in chatting with a random person who I may never see again about the weather, local sports, or some peculiarity of the grocery store. Sometimes I feel bad about it, but I just don’t feel like engaging in personal chit-chat with the grocery store employees or other shoppers. I’m simply on a cold and heartless shopping mission.

My story reflects one of the limitations of money and markets. It enables trust between people and helps organize and order our lives, but it doesn’t really build community or relationships between people. This heartless impartiality of money is a fair critique and it is one of two primary critiques that Yuval Noah Harari presents against money in his book Sapiens. Harari isn’t denouncing money, but he is demonstrating that money and economics are an insufficient explanation for human global expansion and dominance. Humans live as a globally connected species, forming relationships and connections with people from Alaska to Japan to South Africa to England and back again. Money and modern economies helped us forge this global path, but there are things within the human experience that lie beyond the reach of money and the markets that currencies enable. To explain how we got to where we are today, we have to consider economics, but also look beyond money.

“Human communities and families,” Harari writes, “have always been based on beliefs in priceless things, such as honor, loyalty, morality, and love. These things lie outside the domain of the market.” There are certain things we cannot buy and sell, or at least if we do, we are aware that they are not exactly genuine. Purchasing honor, love, or loyalty is more like a quid pro quo rental agreement. I provide you with certain financial incentives and you signal a certain amount of honor, love, or loyalty back toward me. Like modern college football coaches, as soon as a better financial opportunity comes along, all the rhetoric around such values is out the window and all those values are instantly transferred to someone else. Humans don’t cooperate on large scales and build massive societies and institutions simply because someone payed a lot of people to do so. Something more intangible to human existence is necessary.

Markets and money don’t seem to be able to reach those intangibles. Money fosters cooperation and trust between people, but doesn’t necessarily get people to connect and relate to one an other or feel any sense of mutual respect and geniality between one another. My grocery store example demonstrates this. The store trusts that my plastic card will transfer sufficient digital numbers to the store in exchange for the steak that I am taking with me. But I don’t have any real loyalty or good will toward the store and it’s employees. Harari continues, “for although money builds universal trust between strangers, this trust is invested not in humans, communities, or sacred values, but in the money itself and in the impersonal systems that back it. We do not trust the stranger, or the next-door neighbor, we trust the coin they hold. If they run out of coins, we run out of trust.”

Money can break down barriers between groups of people. It can facility trade, cultural sharing, knowledge spread, and tolerance. But it isn’t enough for humans to be a globally peaceful and cooperative species. Money is off limits in some domains, as there are certain things that lie outside the realm of markets. Money doesn’t build meaningful relationships between people in a way that forms long lasting and deep trust and engagement between people. It seems to have been necessary for human global dominance, but insufficient to explain exactly how we have arrived at the modern world we inhabit today.

Money is the Root of all Large Scale Social Cooperation

Money is the Root of all Large Scale Social Cooperation

In his book Sapiens, Yuval Noah Harari writes, “for thousands of years, philosophers, thinkers, and prophets have besmirched money and called it the root of all evil. Be that as it may, money is also the apogee of human tolerance.” Calling money evil is shortsighted. Even saying the pursuit of money is evil is shortsighted. The reality is that humans evolved in small tribal groups where mates were not evenly distributed. Social status and power were important factors in who was able to mate and pass their genes along to the next generation. For ancient hunter-gatherer tribes this often meant that the most physically dominant, the most well connected socially, or those who rose to the highest social status by other means became the person to pass their genes along. The key was accumulating social status and demonstrating status so that everyone knew about it. We can do that today with money, but we can also accumulate wealth, power, and prestige and signal those things through means other than money. Harari calls this out in his book and suggests that money has actually had much more important values throughout the human experience than just serving as the root of all evil as men try to compete for status and power.

Harari continues, “money is more open-minded than language, state laws, cultural codes, religious beliefs, and social habits. Money is the only trust system created by humans that can bridge almost any cultural gap, and that does not discriminate on the basis of religion, gender, race, age, or sexual orientation.” Money enables human trust and cooperation at a grand scale. As Joseph Henrich explains in The WEIRDest People in the World, human tribes broke away from family, clan, and guild centric groups in part through trust that money could build across groups. There was of course much more to the story, but currencies enabled cooperation, trust, and coordination among humans at a large scale, something that other institutions had difficulty accomplishing.

Today people complain about companies and corporations pandering to certain groups or messaging and marketing their goods and services in ways that reinforce what is often called identity politics. The reality is that businesses need to be profitable to survive, and that means they need to convince people to purchase their products and services or shop in their stores. Money and currencies can flow between people of differing demographics and ideologies, allowing for cooperation where none would exist before. Messaging and signaling to people that they should spend their money in a certain way is not an evil, but is a demonstration of tolerance and acceptance. Rather than an evil, money and currency pushes a more accepting stance, even if that means that companies are slow to denounce clearly objectionable people and beliefs and slow to push for needed reforms and innovations. I think it is fair to argue that has more of a moderating effect, limiting the extreme and irrational rejection of some groups in an attempt to sell to the general middle or in a willingness to lose the fringes to remain more in the middle of opinions and beliefs generally. In the end, money, as corporations demonstrate, builds more trust and cooperation among people with different identities and ideologies than would otherwise exist.

Ultimately, money is the root of all large scale cooperation, but not necessarily the root of all evil. It is a neutral tool that has encouraged less discriminatory and biased stances at the same time that is has been a means for signaling dominance and status. Without money we likely couldn’t exist as a global species that interacts and cooperates peacefully a majority of the time.

Money - Signaling & Counterfeiting

Money – Signaling & Counterfeiting

Growing up, I was much more interested in the design and appearance of money than I am today. I remember being fascinated by the faces on paper bills and coins, by the small printing details and hidden items present on currency, and by the small details that contained important information within serial numbers or other markings. Today, as we get further into a digital world and use less physical currency, I hardly think about these factors, but for much of human history, these physical markings and the signals they contain have been incredibly important and worthy of the awe my younger self felt toward them.
 
 
In his book Sapiens, Yuval Noah Harari spends some time examining currencies as a medium of exchange and discusses the crucial role that state sponsored currencies played in the growth and development of human economies and human trust. Currencies created a medium of exchange and money became a great tool to build trust between individuals who had never met, were not family, and otherwise had no reason to trust each other. Currencies helped hold the social world of humans together, and counterfeiting currencies quickly became one of the most serious crimes. Harari writes, “counterfeiting is not just cheating – it’s a breach of sovereignty, an act of subversion against the power, privileges, and person of the king.”
 
 
Ancient currencies tended to feature the likeness or symbol of a powerful ruler. Their images and depictions had tremendous signaling potential, and special, hard to copy markings, helped uphold that signaling potential. Harari explains that a coin stamped with the face or emblem of a ruler was a guarantee based on the honor, power, and authority of that ruler that the coin contained the amount of precious metal that was indicated by the coin – contrasting unmarked ingots or in-kind goods that could be subtly adjusted and manipulated to create unfair trades. Counterfeiting was an act directly against the ruler, their social order, and the trust that a population would have in that ruler.
 
 
The signaling potential of currencies has carried forward to the modern day. American quarters feature a wide variety of state-specific designs on the back, intended to promote the authority, Americanness, and prestige of each state and the notable landmarks in the country. Paper bills feature the faces of presidents and founding fathers (and one day a woman will be added). These currencies still signal the history and authority of the United States. Difficult to copy markings and printing techniques still give us confidence that the currency is authentic. The paper and the coins we may still occasionally use are backed by the authority and trust of American governance, even if that authority and trust is no longer tied to a single king or ruler. Many of the same features of ancient currencies are still at play in our modern money. The signaling role of currency is still central to it’s use, as is the trust it generates. 
Money & Trust

Money & Trust

Currencies are not always intuitive. At a basic level, human trade is more straightforward when we can trade item for item, service for service, or knowledge for knowledge without the use of a different medium of exchange. After a natural disaster, on the playground with playing cards, or in the neighborhood, exchanges of similar things without a currency can be common and straightforward. If you have a lot of extra water but need fuel for a generator after a hurricane, you can probably come to agreement with someone close by who has extra fuel and is need of water. A limitation, however, of exchanging like goods, as can be seen in all three examples, is that such exchanges often require proximity and trust with the individual. Young kids on the playground probably wouldn’t make a lot of trades with random kids they don’t know from other schools (I did as a kid and got burned by a fake card). And neighbors will help each other out, but few of us would ask someone from several blocks away to check on our house while we are on vacation and few of us would shovel snow from the driveway of a house that wasn’t immediately next to ours (no matter how generous we feel during the holidays).
 
 
Currencies are able to overcome these barriers. “Money is the most universal and most efficient system of mutual trust ever devised,” writes Yuval Noah Harari in his book Sapiens. Money allows us to make exchanges with people who are not in our immediate proximity and who we don’t know. I wouldn’t shovel the driveway for someone I didn’t know who lived a few blocks away from me, but I would certainly give them a few pieces of paper or coin in exchange for a lamp if I saw one I was interested in at a garage sale. I don’t need to know the person, know anything about the lamp, or demonstrate that what I was trying to trade them was of equivalent value to the lamp. We could both trust the currency I was using in the exchange and smile and move on without ever seeing each other again.
 
 
Money expands the scope of who we can interact with and facilitates markets by providing a medium through which we can compare different goods, services, and information. It is hard to trade information about an approaching winter storm for a gemstone, but if enough people are willing to give someone money if they can relatively accurately predict the weather, then that forecaster can go purchase a gemstone. If we couldn’t trust the forecaster, if we only had goods and services to exchange for their information, the market couldn’t exist and trades could only rarely take place. Instead we trade currencies, or numbers from digital bank accounts, for information, goods, and services. The money, or digits on the computer screen, are not in themselves valuable, but through our system of trust they become valuable. Currency enables trust and is further enhanced by trust, allowing us to cooperate with more people than just our neighbors or the other kids on the playground.
Risk Literacy Builds Trust

Risk Literacy Builds Trust

In his book Risk Savvy Gerd Gigerenzer writes about a private medical panel and lecture series that he participated in. Gigerenzer gave a presentation about the importance of risk literacy between doctors and their patients and how frequently both misinterpret medical statistics. Regarding the dangers this could pose for the medical industry, Gigerenzer wrote the following, recapping a discussion he had with the CEO of the organization hosting the lectures and panel:

“I asked the CEO whether his company would consider it an ethical responsibility to do something about this key problem. The CEO made it clear that his first responsibility is with the shareholders, not patients or doctors. I responded that the banks had also thought so before the subprime crisis. At some point in the future, patients will notice how often they are being misled instead of informed, just as bank customers eventually did. When this happens, the health industry may lose the trust of the public, as happened to the banking industry.”

I focus a lot on healthcare since that is the space where I started my career and where I focused most of my studies during graduate school. I think Gigerenzer is correct in noting that risk literacy builds trust, and that a lack of risk literacy can translate to a lack of trust. Patients trust doctors because health and medicine is complex, and doctors are viewed as learned individuals who can decipher the complexity to help others live well. However, modern medicine is continuing to move into more and more complex fields where statistics and risk play a more prominent role. Understanding genetic test results, knowing whether a given medicine will work for someone based on their microbiome, and using and interpreting AI tools requires proficient risk literacy. If doctors can’t build risk literacy skills, and if they cannot communicate risk to patients, then patients will feel misled, and the trust that doctors have will slowly diminish.

Gigerenzer did not feel that his warning at the panel was well received. “The rest of the panel discussion was about business plans, which really captured the emotions of the health insurers and politicians present. Risk-literate doctors and patients are not part of the business.”

Healthcare has to be patient centered, not shareholder centered. If healthcare is not about patients, then the important but not visible and not always profitable work that is necessary to build risk literacy and build trust won’t take place. Eventually, patients will recognize when they are placed behind shareholders in terms of importance to a hospital, company, or healthcare system, and the results will not be good for their health or for the shareholders.

Discount Confidence

Discount Confidence

You should probably discount confidence, even your own, when it comes to the certainty of a given outcome or event. I previously wrote about confidence stemming from the logical coherence of the story we are able to tell ourselves. I have also written about how logical coherence of personal narratives is easier when we lack key information and have a limited set of experiences to draw from. The more we know, the more experiences we have, the harder it becomes to construct a narrative that can balance conflicting and competing information. Laddering up from this point, we should be able to see that the more detailed and complete our information, the less coherent and easily logical our narrative about the world should be, and the less confidence we should have about anything.

 

If you have a high level of confidence in your own intuitions, then you probably don’t know enough about the world. If someone tells you they are very confident in something, like say an investment strategy, then you should probably discount the outcome based on their certainty. They may still be right in the end, but their certainty shouldn’t be a factor that leads to your support of the outcome they tell you to be a sure thing. As Daniel Kahneman writes in Thinking Fast and Slow, “The confidence that people have in their intuitions is not a reliable guide to their validity. In other words, do not trusty anyone – including yourself – to tell you how much you should trust their judgment.”

 

We tend to be very trustworthy. Our society and economy run on trust that we place in complete strangers. Our inclination toward trust is what causes us to be so easily fooled by confidence. It is easy to assume that someone who has a lot of confidence in something is more trustworthy, because we assume they must know a lot in order to be so confidence. But as I laid out at the start of this post, that isn’t always the case. In fact, the more knowledge you have about something, the less confidence you should have. With more knowledge comes more understanding of nuance, better conceptions of areas of uncertainty, and a better sense of trade-offs and contradictions. Confidence alone is not a predictor of accuracy. Our assumptions influence how accurate our prediction is, and we can be very confident in our assumptions without having any concrete connection to reality.
Hindsight Bias and Misleading Headlines

Hindsight Bias and Misleading Headlines

I absolutely hate internet ads that have headlines along the lines of “Analyst Who Predicted Stock Market Crash Says Makes New Prediction.” These headlines are always nothing but clickbait, and reading Daniel Kahneman’s book Thinking Fast and Slow has given me even more reason to hate these types of headlines. They play on cognitive errors in our thinking, particularly our hindsight bias. When we look back at previous choices, decisions, and important events, whether in our individual lives or across the globe, our present state of being always seems inevitable. It was clear that the internet would lead to major social network platforms, and that those platforms would then contribute to major challenges and problems with misinformation, how could anyone fail to see this as far back as 2004?

 

The problem of course, is that the inevitable present moment and the pathway that seems so obvious in retrospect, was never clear at all. There was no way to predict a major housing bubble and financial collapse in 2008 if you were living in 2006. Headlines introducing some genius who saw what the rest of us couldn’t see before the Great Recession, and then claiming that this person has made another prediction are pulling at our emotions and playing with hindsight bias in a way that is deliberately misleading. The fact that someone made an unlikely prediction that came true is not a reason to believe they will be correct again in the future. If anything, we should expect some version of regression to the mean with their predictions, and assume that their next grand claim is wrong.

 

Rather than using hindsight bias to convince more people to follow links to bogus news stories, we should be more cautious with hindsight bias and our proclivity toward inaccurate heuristics. As Kahneman writes, “Hindsight is especially unkind to decision makers who act as agents for others—physicians, financial advisers, third-base coaches, CEOs, social workers, diplomats, politicians. We are prone to blame decision makers for good decisions that worked out badly and to give them too little credit for successful moves that appear obvious only after the fact. There is a clear outcome bias. When the outcomes are bad, the clients often blame their agents for not seeing the handwriting on the wall—forgetting that it was written in invisible ink that became legible only afterward. Actions that seemed prudent in foresight can look irresponsibly negligent in hindsight.”

 

Our key decision-makers can be punished by our hindsight bias. It can cloud our judgment for what we should expect in the future and lead us to trust individuals who don’t deserve trust, and mistrust those who are making the best possible decisions given a set of serious constraints. Hindsight bias deserves a greater recognition and more respect than use for misleading headlines.
Confident But Wrong

Confident, But Wrong

We like confident people. We like people who can tell us something direct and simple to understand while being confident in the statements they make. It makes our job as a receiver easier. We can trust someone with confidence because surely they have thought out what they say, and surely their lack of ambivalence or hesitation means they have solid evidence and a logical coherence to the ideas they are expressing.

 

The problem, however, is that confidence and accuracy are not actually linked. We can be very confident in something that isn’t accurate, true, or correct. What is even worse, it can be hard for us ourselves to recognize when our confidence is misplaced. As Daniel Kahneman writes in his book Thinking Fast and Slow, “We are often confident even when we are wrong, and an objective observer is more likely to detect our errors than we are.”

 

We need to surround ourselves with thoughtful people with expertise in important areas where we will be making crucial decisions. We need to collect input from more than one person before we express complete confidence in another person, idea, or prediction. In the real world, this isn’t often possible, but it is something we should at least be aware of.

 

Trusting confident people is a way of answering an easier question in place of a more difficult question. The question might be, should we invest in this mutual fund or that mutual fund, or should we have a totally different investment strategy that doesn’t involve mutual funds. Instead of asking ourselves how we should invest our savings and doing the difficult research to understand the best strategy for ourselves, we switch to a different question and ask, “do I trust the financial advisor giving me the investment advice?” This is an easier question for us to answer. If the advisor sounds smart, has awards on their desk or wall, and exudes confidence, then they are going to appear more trustworthy, and we will believe what they say. They can present us with a lot of confidence, but be totally wrong, and we will likely go with their recommendations anyway.

 

As Kahneman explains, however, outside observers can help us overcome these confidence traps in ourselves and in how we perceive others. If we have a reliable person with knowledge of a certain area, they can help us think through our arguments to determine if we should be as confident as we are. They can help us evaluate the claims of others, to determine whether their confidence is also well deserved or needs more scrutiny. What is important to remember is that we use confidence as a heuristic, and sometimes we can be confident, but wrong with our thoughts and opinions on a given subject.
Scaling Local Networks

Scaling Local Networks

Dave Chase presents an interesting idea about local networks in his book The Opioid Crisis Wake-Up Call. Local networks, Chase explains, grew from the small groups and tribes that humans evolved within. The systems and structures that allowed for cooperation in small groups, have evolved into complex structures of institutions like government, insurance risk pools, and social media. Chase focuses on the health insurance side of these local networks, and considers whether scaling local networks is really the best thing for today’s societies.

 

Chase writes, “When local networks are scaled up, you add hierarchy, says Brookfield [Venture Capitalist Chris Brookfield], and this creates opportunity for theft and redirection.”

 

The idea from Brookfield that Chase is getting at is the idea that many of our systems were formed in small groups and tight communities where social accountability and trust were easy. Everyone knew each other, the community had many close ties and interactions, and it was not hard to keep track of personal debts and obligations. As societies grew, and as our cities, nations, and global structures became more complex, we brought along the same structures of the systems that served our evolutionary tribal ancestors well.

 

However, as complexity grew within those structures, the pitfalls of scaling local networks became apparent. There are too many transactions, too many opportunities for theft and fraud, and too few people who have real oversight and understanding of how the systems work. This allows for abuse of the system and for people to get away with cheating.

 

In healthcare it might look like increasing premiums year-over-year, without a clear explanation as to why premiums are increasing. It might look like unnecessary healthcare expenditures, unnecessary healthcare procedures performed and billed by providers, and opaque systems of approving or denying medical claims. No one knows anyone anymore, no one is accountable, and no one has a clear accounting of debts and obligations. Some outright fraud occurs, a lot of abuse of the system occurs, and even more common, a lot of fudging things and pushing boundaries takes place. Our healthcare insurance system is built on a structure and idea that doesn’t fit the complex high scale realities of the world we live in today.