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Global-Macro Review

“If you mix politics with your investment decisions, you’re making a big mistake.”

-Warren Buffett, 2017

. . . . .

Today’s headlines contain more compelling stories than an Appalachian family reunion. Forcing us to sit back and scan the horizon. As we attempt to identify the risks and opportunities extant in today’s global marketplace.

So, grab a coffee, water or cocktail. And join us as we spitball through a multitude of issues and scenarios burdening the psyches of global investors…
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Tails, You Win.

Long-tail events represent those that occur on the tail ends of the statistical bell curve. Representing rare occurrences that exert a more dynamic impact on everyone and everything involved. Be that even good, or bad. These happenings represent the exception. Not the norm. They can be the two investments – out of 100 – that create one’s fortune. Or they can take the form of an unforeseen crisis. Like the Great Recession of 2008.

The following article on long-tail events was written by the ever-astute Morgan Housel. Excepted from his website, Please enjoy.

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The Genius and the Wolf.

Occasionally, one’s most epiphanic thoughts transpire at four in the morning. As the mind noodles through the day’s detritus. As mine did last night. Having introduced Pulp Fiction to my son. I found myself considering Tarantino’s character, Winston “The Wolf” Wolfe. Played perfectly by Harvey Keitel, Wolf is the classic fixer. Sui generis. Called upon to efficiently navigate any seemingly impossible scenario.

Musing over Keitel’s role, I was reminded that cool resolve and efficiency are often more valuable that intellect. That nerves of eight-inch coiled steel cable – the kind that tethers 300-ton ships to the harbor – can be more beneficial than genius.
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LeBron James: What the Return of the King Can Teach us About Investing

On Father’s Day, June 19th, 2016, I was gifted the impossible. LeBron James and the Cleveland Cavaliers won the NBA title. Beating the highly favored champions of yesteryear, the Golden State Warriors.

Much like this year’s championship duel, the Warriors had the better team. Set NBA records for points. Shooting. Three pointers. They had the league’s MVP — that season’s and the last. They had a talented coach who won multiple championships himself as a player. A well-rounded team with a surplus of stars. Yet, the Warriors didn’t have the one thing that would be singularly responsible for winning an improbable championship: The heart of LeBron James.

The following missive was written prior to that event. In July of 2014. A year in which the Cavaliers finished 33-49. Failing to make the playoffs by a wide margin. Because former Cavalier LeBron James was scoring 27 points per game in Miami. Yet, following that season, immediately before this piece was written, LeBron James announced his return to Cleveland. So completing his journey home. Culminating in that improbable Father’s Day title victory two years later. And the deliverance of a championship to Cleveland. Its first professional championship in 52 years.

Though LeBron James didn’t score the winning basket, he did everything else in his power to propel the Cavaliers to one of the best comebacks in sports history. Claiming an NBA title after trailing 3-1 in the Finals to a Warriors team that finished with the best regular-season record in league history. The Cavaliers became the first team in NBA history to overcome such a deficit in the Finals. 32 teams had previously tried to overcome a 3-1 margin. 32 teams had failed.

LeBron James did it all.

ESPN and the Elias Sports Bureau report that LeBron James led all players on both teams in points, rebounds, assists, steals and blocked shots. Marking the first time a player has led both teams in all those categories in any playoff series of any length.

LeBron James scored 109 points in Games 5, 6 and 7. The most by any player who was on a team that completed a comeback from a 3-1 deficit (non-championship).

In Game 7, LeBron James accrued 27 points, 11 rebounds and 11 assists. The third player to record a triple-double in Game 7 of the NBA Finals. The others? Jerry West in a losing effort for the 1969 Lakers. And James Worthy in the 1988 Lakers’ win.

LeBron James scored or assisted on 50 percent of the Cavaliers’ Finals points, his second-highest mark in a Finals, surpassed only by his 62 percent the previous season when, by the way, he was playing without Kyrie Irving or Kevin Love.

In Game 7, LeBron James scored or assisted on 52 of the Cavaliers 93 points, including 13 of 18 in the fourth quarter. In the series’ first four games, James scored or assisted on 45 percent of the Cavaliers’ points. He was responsible for 57 percent in the last three games. All victories.

In the 2015 NBA Finals, Andre Iguodala won the MVP award, in part due to his defense against LeBron James. Iguodala limited James to 35 percent shooting in the series. In this Finals, James shot 54 percent against Iguodala.

Moreover, LeBron James got it done on the defensive end. He held the Warriors to 36 percent shooting in the NBA Finals Game 7 (21-of-58). The best of any Cavs player. Stephen Curry was 1-of-7 against him. Klay Thompson was 2-of-6.

The Warriors did not make any of their seven shots against James in Game 6.

James blocked seven shots in transition. Including one on Andre Iguodala with 1:50 remaining in the fourth quarter of a tied Game 7 — the season’s signature moment. James was also the primary defender for 14 turnovers, tied for most of any player in the series.

This was James’ third NBA title. James, Michael Jordan, Bill Russell and Kareem Abdul-Jabbar are the only players to win three titles and four MVPs.

Lay low you doubters, detractors, denigrators and naysayers. The King has returned.
. . . . .

“And as I sat there, brooding on the old unknown world, I thought of Gatsby’s wonder when he first picked out the green light at the end of Daisy’s dock. He had come a long way to this blue lawn and his dream must have seemed so close that he could hardly fail to grasp it. He did not know that it was already behind him, somewhere back in that vast obscurity beyond the city, where the dark fields of the republic rolled on under the night.

Gatsby believed in the green light, the orgiastic future that year by year recedes before us. It eluded us then, but that’s no matter — tomorrow we will run faster, stretch out our arms farther. . . And one fine morning–

So we beat on, boats against the current, borne back ceaselessly into the past.”

-The Great Gatsby, F. Scott Fitzgerald
. . . . .

Whatever heights we may ascend, we remain forever drawn to those from whence we came.

Two weeks ago, as the sports world held its collective breath, Lebron James announced his return to Cleveland.

Four years prior, James severed ties with the Cavs’ inept front office in hopes of sunnier days in South Beach. Four championship appearances and two titles later, the King will return to Northeast Ohio.

Amid the sound and fury surrounding The Decision II, we identified four correlations between the machinations surrounding the NBA’s biggest name, and the dynamics within the U.S. stock market. And so here is what King James might teach us about investing, and life.

Be Proactive Throughout the Highs and Lows
Every endeavor worth pursuing involves highs and lows. Emotionally. Professionally. The means by which one responds to those junctures, be they positive or negative, will ultimately determine an outcome’s success, or lack thereof, each and every time.

After leading the Cavs to four playoff appearances including a trip to the finals in which they lost to the Spurs, Lebron grew tired of Cav’s owner Dan Gilbert. Tired of Gilbert’s lack of vision and inability to provide the complimentary pieces necessary to win a title.

For seven years, Lebron succeeded while carrying a cast of characters more reminiscent of the Washington Generals than an NBA championship team. Gilbert, putting all of the team’s hopes on the shoulders of his star, never delivered so much as a back-up scoring threat. Frustrated, Lebron analyzed the situation, appraised his options, and chose to be proactive in dictating his future circumstances.

James could have played the hometown hero. Always falling just short because of the ineptitude of those around him. But, that wasn’t his style. Even at his emotional nadir, he knew his value. So, he opted to play for a more capable, savvy and experienced management team in Miami. Led by the legendary Pat Riley.

Likewise, investors were collectively depressed and traumatized by the events of 2008. On the advice of their advisors, many had simply held on to portfolios that didn’t stand a chance. Failed to get proactive as financial markets deteriorated. Watched stoically as their nest eggs were eviscerated. Even as advisors admonished them to “stick with the plan.”

Problem was, there was no plan — at least not one to benefit investors. There were, however, empty words and a “buy-and-hope” methodology meant to simplify the lives of the advisors. Help advisors to avoid tough decisions. To avoid the creation of a genuine investment process.

Much like Dan Gilbert’s plan enhanced his financial circumstances without improving the team’s championship odds, advisors had adopted a lackadaisical course that prioritized their needs above those of clients.

Create and Execute a Plan
When Miami Heat general manager Pat Riley first approached James in 2009, he had no intention of obsequiously fawning over the NBA’s best player in order to woo him to South Beach. It was immediately obvious that Riley, a proven champion in his own right, had a plan. One that entailed building a compliment of experienced, talented role players willing to integrate their skills with, and defer their egos to, Lebron’s pursuit of NBA championships.

Impressed, Lebron bought in. He had never played within a strategic framework. His high school team, AAU team, even his seven-year stint with the Cavaliers — had all entailed one simple idea. Feed the ball to Lebron so that he could score and win.

Problem was, when James’ teams came up against talented, disciplined, tactically minded squads, they often employed strategies focused on shutting Lebron down. For they knew that if Lebron was held in check, the compliment of players around him were not capable of winning.

Consider the 2007 NBA championship pitting the Cavaliers against the Western-champion San Antonio Spurs.
Coming into the game, everyone knew that James would be the best player on the court. Accordingly, he would likely lead the Cavs to their first championship. But, Spurs coach Greg Popovich new better.

The Spurs employed a systematic offense that highlighted the talents of their three stars, Tim Duncan, Tony Parker and Manu Ginobili. Further, they employed a crushing defense designed to prevent Lebron from taking over games. It proved effective. The Spurs slowed down Lebron. The other Cavalier players failed to step up. And the Spurs routed the Cavs in four straight games.

In Miami, Riley assured Lebron that he would be able to trust upon his team to win games. That he would no longer be a one-man show. Riley laid out his plan. As well as the strategies and tactics designed to win championships. Lebron loved what his saw. Joined the Heat. Won two championships in four years. Because Pat Riley had a plan.

Similarly, investors must have a plan catering to their personal circumstances and designed to achieve their personal objectives. A plan that they adhere to. In all market environments.

Following the 2000 to 2002 bear market, the Wall Street Brokerages recognized the need to change their business models. They would no longer train brokers to customize each individual relationship to meet the personal needs of each client. Instead, they would retain the appearance of personalized relationships, while training brokers to employ generic, turn-key strategies that fit each and every client.

These mass-production strategies appeared effective as markets rose. Brokers were able to allocate client capital to a set array of mutual funds or money managers which would track the market. Enabling Wall Street’s sales force to frenetically market its wares to potential new clients, attract new assets under management (AUM), while paying scant heed to the attainment of real, personalized life goals of existing clients.

Clients, realizing that personal finance was not a strength, accepted the idea that allocating capital to a handful of investments and hoping for the best was a plan. That was, until the 2008 credit crisis revealed the ugly truth.

Process is Paramount
Throughout 15 years of competitive basketball, Lebron had acclimated to being the offensive and defensive centerpiece for every team on which he played. His coaches, realizing the vastly superior talent he possessed, knew that they would win, so long as Lebron was on the floor. Quite simply, when superhuman talent competes against human ability, little strategy is required.

Skipping college and going directly to the NBA, Lebron was still dominant. His physical strengths and on-court skills were simply that good. Yet, James quickly realized that he could no longer single-handedly determine a game’s outcome in the NBA. The competition was too tough.

Cavalier’s coach Mike Brown attempted to develop an offense that took some of the pressure off Lebron. But, the portfolio of players around him was simply not up to the task. Time and again, Lebron and the Cavs fell short of their championship dreams.

The Miami Heat, however, were coached by Pat Riley protégé Eric Spoelstra, who recognized that the greatest of NBA players had required a system that enabled teams to leverage that greatness, while providing complimentary assistance along the way.

That in mind, Spoelstra developed an offense predicated on explosively attacking the lane. This permitted the team’s sharp shooters to spread the offense out, and stretch defenses thin. Accordingly, James, Dwayne Wade, Chris Bosch, or any of the Heat players could drive to the basket and choose to take the shot or, if the defense collapsed on them, kick the ball out to a compliment of sharp shooters waiting on the wings.

Combined with the league’s most tenacious defense, the Heat had a recipe for success that overwhelmed the average opponent. Permitting them to play in four NBA championships in four years, winning twice, and fulfilling Lebron’s championship ambitions.

Yet, process and methodology are not strictly the fare of professional sports. Every walk of life is enhanced by a proven process capable of minding the details, endeavoring towards the attainment of goals, and mitigating risk whenever possible.

In 2008, as advisors pleaded with clients to “stick with your plan,’ investors increasingly saw that their plans were nothing more than ploys. Plans that worked in good times, not in bad. That enabled the broker to collect an annual fee for doing little more than outsourcing client capital to third-party managers, then discussing the merits of these funds or managers twice per year.

As stocks plummeted, and client portfolios dropped dollar for dollar, investors realized that their brokers had no more an investment process than they did a means of protecting their clients’ downsides.

Suddenly, all the pithy aphorisms long used by brokers sounded like suicide pacts.

“I don’t know where stocks will be in three months, but in three years, if we patiently ride this out and stick to our plan, you will be fine.”

Only, these suicide pacts were one-way agreements, as the brokers were often investing their own capital in ways completely different than the auto-pilot portfolios utilized for clients.

There were no risk mitigation strategies. No alternative investment classes with little to no correlation to the stock market. No means of preserving capital in desperate, panic-driven markets. Just empty words on a phone line that did nothing to preserve the nest eggs cobbled together during the course of a lifetime.

Management guru Dr. W. Edwards Demming often said, “If you can’t describe what you are doing as a process, then you don’t know what you’re doing.”

By January 2009, investors realized that their brokers had little real idea as to what they were doing from an investment standpoint. Unfortunately, the damage was done.

Reversion to the Mean
Following the 2013-14 NBA season, and a soul-crushing loss in the finals to the San Antonio Spurs, Lebron James contemplated change.

Miami had been good to him. He loved playing with close friends Wade and Bosch. The Heat’s leadership, Riley and Spoelstra, possessed excellent basketball minds as well as big hearts. James had fulfilled his championship aspirations.

Yet, James’ family, friends and heart remained in Northeast Ohio. His Miami experience had enabled him to grow. As a player. And a human being. He now realized that the fulfillment of his ultimate ambitions did not involve winning more championships in South Beach. But bringing one to his hometown.

He would return to the place he’d begun. His life. And his career. Even given the difficult circumstances under which he’d departed Cleveland, the wounds had healed. He could go home.

Lebron’s decision to return to Cleveland underscored a central tendency in all established yet complex systems: reversion to the mean.

History. Psychology. Mathematics. Science. Each discipline is littered with examples of this principle. Similarly, the history of asset investment is replete with tales of mean reversion. Asset prices go up. Asset prices go down. Markets serve as a pricing mechanism for the underlying assets therein. All the while, investors are driven by the perpetual cycle of fear, ignorance, hope and greed.

When markets burn white hot, investors jump in head first. Committing capital at the most inopportune times. When markets plummet, and fear permeates every motive, investors avoid assets that can, at last, be purchased for reasonable prices.

Yet, eventually every high and low reverts to the mean. The S&P 500 returns to its traditional price-to-earnings ratio of 15x. Apple’s price-earnings-to-growth ratio normalizes to 2.25. Students of the market understand this. Which enables them to think calmly when markets rise parabolically. To remain sanguine when hysteria reigns. To avoid the poor decisions that doom investors to repeat the same poor decisions over and again. From the days of bartering in the markets aside the Roman Coliseum, to today’s trading pits within The New York Stock Exchange.

Everything eventually returns to its proper historical place. That neighborhood, trend line or birthplace at which one was meant to reside. The place to which prices, valuations or the human heart must return.

Be it a stock price, an index, a political system, or a young boy from Akron Ohio.

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Catalysts for the Next Financial Crisis

What are the catalysts for the next financial crisis? On America’s west coast reside a variety of geologic fault lines whereby the earth’s large, shifting tectonic plates butt up against one another. Sometimes, these tectonic plates — and the fault lines where they meet — shift and move in such a way that we hardly notice without the aid of seismic monitoring technology.

Other times, however, these machinations occur in such violent fashion that the resulting earthquakes can destroy much of that which rests upon them.

Analogously, economic fault lines exist, which could act as catalysts for the next financial crisis, exposing the massive tectonic plates that ebb and flow beneath the global economy. On occasion, the shifting economic plates result in downturns in indicators by which their monitored. But sometimes, the shifts cause massive disruptions to the sovereign and global economies. Wreaking financial havoc upon the economic participants that rest upon them.
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Debt: A Legacy

Debt kills. Like cancer. A silent killer. Imbuing its victims with anxiety. Filling their brains with cortisol and other stress-inducing hormones. Degrading their health. Mental stability. And quality of life.

Eight years ago, a beloved client died. Great guy. Loved by all. A longtime entrepreneur, his business employed a close-knit group. He put multiple kids through college. And was the life of every party. Upon his passing, however, Pandora’s box opened. His pride had prevented him from sharing a dark secret. His business was leveraged to the hilt. Millions of dollars in debt.

His wife and kids were left to bury him. Pay homage to a life well lived. And then to worry about the hole in which they now found themselves.

Two weeks ago, the Congressional Budget Office (CBO) issued its 10-year outlook. For the fiscally pragmatic? The news was not good.

Over the next decade, the annual federal deficit will average $1.2 trillion. During that period, it will rise from 3.5 percent of GDP (the nation’s annual economic output) in 2017 to 5.1 percent by 2027.

Correspondingly, the national debt — driven as it is by annual deficits — will rise from $15.7 trillion to $28 trillion. Nearly doubling. And surging from 78 to 96.2 percent as a share of GDP. The highest such percentage since the end of WWII.

Only, back then we’d just finished saving the world from murderous fascist dictatorships. Today, we’re simply making sure everyone’s comfortable.

Meanwhile, our political class has provided a disturbing amount of empirical evidence as to its complete lack of cojones. Leading us to believe that the tax cuts slated to disappear in 2025 will not be removed. And the defense hawks and defenders of social justice programs are unlikely rescind anything granted to their constituents thus far. Which means we must more than casually apprise ourselves of the CBO’s estimates stating that if current policies continue — which they will — rather than sun-setting at pre-determined dates, the deficit will rise another $2.6 trillion this next decade. To a staggering $15 trillion. Pushing the national debt to an astonishing 105 percent of GDP.

That level has been exceeded only once in the nation’s history. And could represent a fork in the road from which we may never turn back. Of course, your children and grandchildren have no idea as to any of this. But they will be left with the tab. One that will permanently inhibit their chances at acquiring any semblance of financial prosperity.
D.C. obviously doesn’t care. Do you?

In the near term, the growth benefits from tax reform may help to allay these fears. As the CBO projects that last year’s tax cuts will boost growth to 3.3 percent in 2018. And to a respectable 2.4 percent next year. After which growth is expected to subside to 1.9 percent. Where it is projected to remain for much of the following decade.

Nor has one political party presided over this mess more than the other. Neither the Democrats nor the Republicans have shown any iota of fiscal restraint.

President Bush spent a fortune in the Middle East. President Obama doubled the national debt. Then oversaw a 35 percent increase in the federal budget deficit in his final year in office. President Trump has increased military appropriations. And granted tax cuts. Both of which we agree with. But not at the cost of fiscal sanity. All the while, Congress has spent like a horde of drunken sailors on shore leave.

Most of our future debt concerns stem from runaway entitlement programs. Programs that will eventually demand the lion’s share of the nation’s annual nest egg. Social Security. Medicare. Medicaid.

Worsening matters, in a rising interest rate environment, the cost of the nation’s debt service — the interest payments on the national debt — will only increase year after year.
Frighteningly, the nation’s political class (Not leaders, as leaders are those who make difficult decisions, and these people only serve their political careerism) has refused to do a thing about this simmering volcano. Because our coddled society will never vote for a reduction in benefits. Enamored, as we are, with extending those benefits whenever possible.

Society seems ever wanting of more government assistance. Consider Mark Zuckerberg’s preposterous “universal income” idea. Or Bernie Sanders’ offers of government-paid tuition. Or the desire to invite millions of unskilled immigrants into the country when — at the very least — we could ensure that a set percentage of these individuals bring skills that would immediately benefit the nation’s economic productivity. And thus the nation as a whole.

If your household is destitute, would you be acting prudently by filling it with flat screens and new furniture? So, why does no one bat an eye as the nation does exactly that?
Yet, a recent Bloomberg article stated that “Americans’ love of pricey pickups and sport utility vehicles is stretching their wallets.” The article mentioned that Ram “Big Horn” trucks are selling like Playboys in my eighth-grade school yard. Only these trucks cost $70,000. With an average loan term of 73 months.

With a six-year loan term, don’t be surprised to see most of these loans end in financial disaster. Like home mortgages last decade. Where the borrowers default on an asset in which they are upside-down.

Another debt-driven vulnerability?

Consider the student-loan market. In 2009, total student-loan debt was about $771 billion. A huge number, right? By October last year, that number had soared to around $1.5 trillion. Almost doubling.

Student-loan debt is a financial disaster in the making. You can make a case that we could see hundreds of billions of dollars in defaults. Of course, these are the same millennials who were buying Bitcoin and other crypto currencies last year. Right as it turned into bubble. And assets fell by as much as 70 percent.

Excuse me. I don’t mean to rant.

If we won’t abdicate our big spending ways, and our out-of-control entitlements, then we must figure out a way to enhance the nation’s productivity. And drive the positive side of the balance sheet by pushing GDP growth higher.

We could increase productivity by stemming the flow of women leaving the workforce. Invest in programs that allow ambitious females to work while also serving as good mothers to their children. Europe has had success in this area.

We might also increase the number of working-age immigrants entering the country. Especially those with skills sorely lacking throughout various tranches of the workforce. This might require reducing the number of slots dedicated to family reunification, which most Democrats oppose, while also increasing the number of immigrants, a reversal of the Trump administration’s policy.

But difficult situations require difficult decisions. So, we’d best begin making some. Because when you couple an aging society with falling economic productivity, you’re essentially asking for a fiscal miracle if we wish to avoid a debt crisis without making some near-term policy changes. We might begin by asking Congress to adopt a fiscal policy consistent with these realities. Instead of pollyannically currying to every special interest group.

Nobody ever wants to be the pragmatic ant. Always preparing for winter. Living within his means. Planning for whatever lay ahead. It’s more fun to be the violin-playing grasshopper. Because life is always a party. And gratification need never be delayed.

Aesop reveals that, once winter arrived, the ant was prepared. Allowing he and his family to comfortably bide their time as the frozen winds blew overhead. Meanwhile, our fun-loving grasshopper never made the tough decisions. And was wholly unprepared for the inevitable freeze. When spring arrived, he was never seen again. Though his survivors inherited a violin. And a legacy of debt.

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Lying: The Person Who’s Best at Lying to You is You

In 2008, the psychiatrist Stephen Greenspan published The Annals of Gullibility, a summary of his decades of research into how to avoid being gullible and susceptible to lying. Two days later, he discovered his financial advisor Bernie Madoff was a fraud, who had caused Greenspan to lose a third of his retirement savings, all because of his advisor’s lying.

This anecdote, from a presentation by University of Michigan social psychologist David Dunning, due to be presented at the 20th Sydney Symposium of Social Psychology in Visegrád, Hungary in July, highlights an unfortunate but inescapable truth: We are always most gullible to ourselves. As Dunning explains it, Greenspan – despite being the expert on gullibility – fell prey to Madoff’s fraudulent behavior not simply because Madoff was some master manipulator, but because Greenspan had, essentially, tricked himself. In short, the person who’s best at lying to you is you.

“To fall prey to another person you have to fall prey to your belief that you’re a good judge of character, that you know the situation, that you’re on solid ground as opposed to shifty ground,” says Dunning. Greenspan, Dunning notes, failed to follow his own advice and take appropriate cautionary steps before trusting someone in a field he knew little about. Though he wrote the book on how not to be overly confident of your own judgments, Greenspan went against own advice when he handed over his savings without properly interrogating both Madoff’s confidence in himself, and his own sense of confidence in Madoff. Had he followed his own counsel, Greenspan would have recognized he knew little about financial investments, and would have done far more research before deciding to hand over his money to Madoff.

Dunning is an expert on the human tendency to overestimate confidence in our own knowledge and beliefs. In 1999, together with social psychologist Justin Kruger, Dunning identified the co-eponymous Dunning-Kruger effect: people who are incompetent and lack knowledge in a field tend to massively overestimate their abilities because, quite simply, they don’t know enough to recognize what they don’t know. So hugely unqualified people erroneously believe that they’re perfectly qualified. (This effect that has an unfortunate tendency to create the worst possible bosses. It’s also the opposite of imposter syndrome, which describes when qualified people worry that they aren’t qualified.)

In his latest presentation, Dunning highlights the studies that collectively show how we repeatedly and consistently fool ourselves into thinking we know more than we do, and so convince ourselves that our opinion or choice is right – even when there’s absolutely no evidence to support this. There are dozens of studies supporting this hypothesis, showing, for example, that British prisoners rate themselves as more ethical and moral than typical citizens, and that people mistakenly believe they’re better than others at reaching unbiased conclusions. Again, the person who’s best at lying to you is you.

People tend to be just as confident in their false beliefs as their accurate ones. In one 2013 study, participants were asked a physics question about the trajectory of a ball after it was shot through a curved tube. Those who said the trajectory would be curved (wrong) were just as confident that their answer was correct as those who correctly stated the ball would have a straight trajectory.

A body of research has also established what scientists call “egocentric discounting”: If participants are asked to give an estimate of a particular fact, such as unemployment rate or city population, and then shown someone else’s estimate and asked if they’d like to revise their own, they consistently give greater weight to their own view than others’, even when they’re not remotely knowledgeable in these areas.

Our false confidence in our own beliefs also deters us from asking for advice when appropriate – or to even know to whom to turn. “To recognize superior expertise would require people to have already a surfeit of expertise themselves,” notes Dunning.

Lying to oneself is not a modern phenomenon. But the effects are exacerbated in the age of social media, when false information spreads rapidly. “We’re living in a world in which we’re awash with information and misinformation,” says Dunning. “We live in a post-truth world.”

The issue is that the current environment convinces people they’re more informed than they actually are. It might, says Dunning, actually be better for people to feel uninformed. “When people are uninformed, they know they don’t know the answer,” he says, and so they will be more open to hearing from others with real expertise. If we think they know enough, however, we’ll just “cobble together what seems to us to be the best response possible to someone asking us our opinion, or a policy, or what we think,” says Dunning. And, he adds, “unfortunately we’re programmed to know enough to cobble together an answer.”

There’s no quick fix to this, but there is a key step we could take to avoid being so willfully misinformed. We need to not only evaluate the evidence behind newly presented facts and stories, but evaluate our own capability of evaluating the evidence.

The same questions we consider when evaluating whether to trust another person should apply to ourselves: “Are you too invested in this thought or belief you have? Are you really giving the conclusions you’re reaching due diligence? Are you in over your head?”, says Dunning.

That said, constantly questioning ourselves would be impractical, leading to a constant state of self-doubt and uncertainty. Most effective, says Dunning, would be to focus on situations that are new to us, and where the stakes are high. “Normally those two situations go together,” says Dunning. “We only buy so many cars in our lives, we only invest large sums of money every so often, we only get married every so often.”

Of course, as that last example shows, at some point you have to give up being savvy and just trust your own judgment – both in yourself and others. Dunning quotes novelist Graham Greene: “It is impossible to go through life without trust…that would be to be imprisoned in the worst cell of all, oneself.”

We can though, learn to be a little more careful and wise. Just as we don’t blindly trust every person we meet, there’s no reason to be utterly trusting and gullible to ourselves.

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Passive Indexing and its Looming Pitfalls.

In today’s post, I’ll talk about passive indexing. The investor class has long fancied its decision-making skills. Its ability to perceive and manage risk. On decisions bolstered by probability and statistics. Rather than the whim of cognitive psychology.

Of course, the “overconfidence effect” has long plagued investors. This simple bias dictates that a person’s subjective confidence in his own judgements is reliably greater than the objective accuracy of such judgements. Especially when confidence runs high. As overconfidence is a perfect example of the miscalibration of subjective probabilities.

Investors — like all humans — base many of their decisions not upon the subjective analysis of statistics and probability, but on simple “rules of thumb.” Cognitive shortcuts, known as “heuristics” that simplify the decision-making process. And leave us feeling good in the wake of those decisions.
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