CHAPTER 4
It’s the End of the World as We Know It
Men resist randomness, markets resist prophecy. —Maggie Mahar On December 17, 1954, The Chicago Tribune ran the following headline: The paper interviewed Dr. Charles Laughead at the home of Dorothy Martin. Dr. Laughead informed the paper that Martin received communications “from outer space.” Reporters were told these communications from outer space revealed to Martin the world would be coming to an end from a great flood. Practically all life on earth would cease to exist in the aftermath, save for the small group of followers who were stationed at Martin’s home. Martin convinced her supporters “Supreme Beings” from a planet called Clarion sent her messages promising they would save only the true believers. These messages flowed through her from other planets which would then come out as her own writings which she would relay to her group of fellow flying saucer aficionados. Dr. Laughead further explained, “There will be a tidal wave, a volcanic action, and a rise in the ground extending from Hudson’s Bay [in Canada] to the Gulf of Mexico which will seriously affect the center of the United States. There will be much loss of life, practically all of it, in 1955. It is an actual fact that the world is a mess. But the Supreme Being is going to clean house by sinking all of the land masses as we know them now and raising the land masses now under sea.” The doctor further explained that Martin had received intel from the Supreme Being which told her they would be sending a spacecraft to save her group from this cataclysmic event. The newspaper didn’t put much faith in these prophecies as they only ran a short story on page three of the paper that day, but Martin’s followers certainly were true believers in her word. She informed her disciples that as long as they followed her teachings they would be spared. This group of roughly 30 people was extremely committed to the cause so they sold all of their possessions, quit their jobs, or stopped going to school in preparation. As the group sat outside of Martin’s home on Christmas Eve they sang carols and waited with anticipation for the coming of their saviors. Unfortunately, this was the fourth time the group had been told to wait outside to hitch a ride on the interstellar highway. Each time they waited with bated breath, but their spaceships never arrived.[1] Each time they didn’t show Martin informed her followers of a message that had been relayed from the aliens as a reason for their tardiness. There was always a good excuse, so they convinced themselves each time it didn’t happen it must have been a practice session. Martin informed her group the Guardians were to pick them up on the front lawn at midnight on Christmas Eve. When this failed to transpire, the group sat motionless in her living room. They were confused and grasped at straws to come up with reasons for the no-show by their alien brethren. After initially being at a loss for words, Martin finally garnered up the energy to inform the group they had spread so much light that God had saved the world from destruction. It was a Christmas miracle! The members could have chosen to look themselves in the mirror and realize the end-of-the-world prediction was wrong, but that would have required admitting all of the outlandish actions they took and beliefs they held leading up to that point were false. When faced with the prospect of admitting you’re wrong or looking for a better explanation, most people get busy looking for an explanation. A few short hours after their failed predictions, Dr. Laughead said the following: I’ve had to go a long way. I’ve given up just about everything. I’ve cut every tie. I’ve burned every bridge. I’ve turned my back on the world. I can’t afford to doubt. I have to believe. And there isn’t any other truth.[2] In Shawshank Redemption, Andy Dufresne says, “Get busy living or get busy dying,” before making the decision to break out of prison. For people with a strong belief system, that quote looks more like “Get busy living and get busy lying.” The day after the spaceship and flood failed to show, the group’s members continued to make outlandish prediction after outlandish prediction in hopes at least one of them would come true. There was no soul-searching for what went wrong for the simple reason that these people were far too invested in an outrageous outcome. One of the members purchased a number of expensive new outfits to wear as many pretty things as she could before the flood came. Another quit her job to live off her life savings. A quote from another member shows just how much conviction they had: “I have to believe the flood is coming on the 21st because I’ve spent nearly all my money. I quit my job, I quit school, and my apartment costs me $100 a month. I have to believe.” They almost all quit their jobs and got rid of their possessions because they truly believed life on Earth was coming to an end and that they would be saved by aliens in a flying saucer.[3] The concept of cognitive dissonance was developed by psychologist Leon Festinger in the 1950s. It arises when a person simultaneously holds two different beliefs that are inconsistent with one another. The theory is that when this happens it causes our minds discomfort, which we then seek to reduce. Whenever this inconsistency in our attitudes, ideas, or opinions kicks in, our default is to eliminate that dissonance. Humans have evolved over time to avoid discomfort, so when we encounter issues that we disagree with it’s much easier to simply classify them as being wrong without putting too much thought, effort, or reasoning into it. An alarm bell usually goes off in our head alerting us to this inconsistency, so we give ourselves a mental break to avoid these internal conflicts. In Festinger’s original experiment he asked participants to perform a series of boring tasks for an hour. Once these tasks were finished subjects were supposed to tell another waiting subject that what they were doing was all very exciting to entice them to do the same. They were then separated further into two groups who were paid either $1 or $20 for this acting performance. The researchers found that those who were only paid $1 actually rated their experience performing a dull task as being more enjoyable than the people who were paid $20. The $1 group talked themselves into their actions being enjoyable to reconcile internally with the fact that they wasted time, earned very little, and lied to others about it. This dissonance was only overcome by the false belief that what they did was more enjoyable than it actually was, while the people who were paid $20 were able to recognize they were simply doing it for the money. Basically, cognitive dissonance leads to self-delusion.[4] Most psychology experiments are conducted in a laboratory or classroom, but Festinger speaks from experience. Festinger and a team of researchers at the University of Minnesota heard about Martin and her followers and decided it would be the perfect opportunity for a real-world study. They earned her confidence in fall of 1954 and were able to infiltrate the house her followers had all gathered in to observe their actions and words leading up to the supposed arrival of the aliens. The researchers not only witnessed this group leading up to their end of the world prediction, but in the aftermath as well. Their research findings were documented in the groundbreaking book When Prophecy Fails, which was influential in the study of cognitive dissonance. A person with conviction is extremely hard to deal with, even when presenting them with alternative facts. Festinger wrote: Suppose an individual believes something with his whole heart; suppose further that he has a commitment to this belief, that he has taken irrevocable actions because of it; finally, suppose that he is presented with evidence, unequivocal and undeniable evidence, that his belief is wrong: what will happen? The individual will frequently emerge, not only unshaken, but even more convinced of the truth of his beliefs than ever before. Indeed, he may even show a new fervor about convincing and converting other people to his view.[5] There was a study performed in the 1980s that exposed a group of people with strongly held positions on social issues to four different arguments on the topic, two pro and two con. For each side of the aisle, there was one argument that was very plausible and another that was wildly implausible. Researchers found people tended to remember the plausible arguments that supported their views and the implausible arguments that went against their views, forsaking the other side.[6] People latch onto arguments that support what they already believe and ignore even plausible evidence to the contrary. Plus, we tend to seek out implausible arguments only when they strengthen our own opinions. This is why an abundance of information like we have at our disposal today doesn’t necessarily change people’s minds. There is so much data, analysis, opinions, and information available that you can spin almost any argument in your favor if you so choose. The outcome is almost irrelevant in most cases because your brain is already convinced you’re right. Your brain would rather win an argument than get to the bottom of the issue at hand. You may never find yourself waiting in the cold for a flying saucer to save yourself and your cult friends from an apocalyptic flood, but you will be subject to predictions about the end of the world in other endeavors in life. At the height of his popularity in the early 1980s, Joe Granville was bringing in over $10 million a year selling investment newsletter subscriptions. The flamboyant market prognosticator traveled around the country giving seminars to drum up business for his service which would send stock market buy and sell recommendations to his subscribers. Granville was well known for his stock market advice, but he was even more well known for his antics at these events. At a seminar in Tucson, AZ he began walking across the pool on a hidden plank just beneath the water’s surface, telling the crowd, “And now you know!” In Atlantic City he was carried in a coffin under a shroud of ticker tape and “resurrected” himself with a martini in hand in front of the crowd.[7] Granville would often drop his pants during speaking gigs to show the audience his boxer shorts which had stock quotes on them. Props such as puppets and clown outfits were often used along with musical instruments. These spectacles kept everyone’s attention, but the main event was his predictions about the markets.[8] Not only did Granville opine on the stock market, he also claimed to follow 33 different earthquake indicators. “If you knew what I knew, you couldn’t keep quiet,” he claimed while predicting Phoenix would become beachfront property at one point. The forecaster even gave an exact time, 5:31 A.M. PST to be exact, that California should expect an earthquake measuring 8 on the Richter scale to hit. This prediction was based on the alignment of Jupiter, Saturn, and Mercury of course.[9] But his most famous, or rather infamous, prediction came in early January of 1981. Granville sent a late-night recorded phone message to his 3,000 Early Warning subscribers to “sell everything.” The next day was the heaviest trading in the history of the New York Stock Exchange up to that point, with markets falling more than 2%. Granville would appear on the cover of the New York Times. The timing of the call couldn’t have been worse. Any of his subscribers that followed this prediction missed a face-ripping stock market rally in the early-1980s as Granville stayed bearish while markets almost doubled.[10] Granville’s infamous sell signal in January of 1981 is often panned because of the poor timing but the odd part about this prediction is that the most recent edition of his newsletter, sent to clients just a few days prior, told them to “buy aggressively into the market.’’[11] After realizing the error of his ways, Granville stated, “I will never make a serious mistake in the stock market again.” Narrator: Yes, he would. Granville’s misses far outweighed his hits for the remainder of the decade. Mark Hulbert has been tracking the performance of investment newsletters for a number of decades. When he looked at Granville’s long-term track record of performance from market-timing calls, he found from 1980 through January 2005, Granville’s stock tips lost almost 1% a year compared to a 12% annual gain for the stock market in that time. His more aggressive recommendations lost 10% per year in that time.[12] Granville has had plenty of company over the years in terms of people who were so sure of their prediction systems yet were flat out wrong. Near the bottom of the brutal bear market in 1974, James Dines, another investment newsletter publisher, took out an ad proclaiming “THE DINES LETTER HAS NEVER BEEN SO BEARISH.” Dines claimed, “We’re gonna have a full-scale collapse within the next six months. There may be violence in the streets.” Over the next year the Dow went much higher, from 600 to 1,000. There was no full-scale collapse. In 1982, magazine ads from William Finnegan, a computer trading firm in California, made the following promise: If you happen to know what the Dow Jones Average will be 80 trading days from now, you could make quite an impression on your friends. Not to mention your banker. Well, you can know. To gain this knowledge about the future price of the Dow, you had to buy a computer program that would then spit out the market outlook for the next 80 days. When the model was initially rolled out, every single day for the next 80 days, Finnegan’s model predicted a market decline. The first day was a prediction of a 7.5% loss. Instead the market was up 1,000 points during those 80 days.[13] In Granville’s defense, he was more of an entertainer than an actual investment advisor. He even admitted to the Wall Street Journal in 1989, “I observed that when people are entertained, they will retain more information.” Another time Granville observed people retain three times as much information when they’re entertained.[14] There’s a huge difference between prediction and advice, but most people latch onto predictions because they’re sexier. Forecasts may be exciting but they tell you nothing about what the future has in store. Linton Wells was an expert in national security and served in a number of different roles in the White House under both Bill Clinton and George W. Bush. As the Deputy Assistant Secretary of Defense to President Bush, Wells published a memo titled “Thoughts for the 2001 Quadrennial Defense Review.” It looked at the state of the world at the beginning of each decade starting with the year 1900. The memo read: This was sent to the President a mere six months before 9/11 turned the world upside down. The decade that followed included war, political turmoil, the Great Financial Crisis, and countless geopolitical crises around the globe. The one constant we face as a species is irreducible uncertainty. It doesn’t matter if you’re Jeff Bezos, George Soros, or the President of the United States. No one has a clue what the future holds. Of course, that doesn’t stop us from trying to guess what’s going to happen in the future. In many ways, our actions on a daily basis are based on forecasts whether we admit it or not. We forecast our relationships, our careers, our finances, and our interactions with other people. But there is a huge difference between being right about how the future will play out, and success in the markets or business world. Philip Tetlock is an expert in tracking the forecasts of, well, other experts. Going back to the 1980s, Tetlock tracked the results of tournaments of 300 or so forecasters, who were experts in a wide variety of fields. This group made around 30,000 predictions about geopolitics, economics, and markets over a two-decade period. Tetlock discovered these experts were wrong more often than they were right. Not only that, but they would have been more accurate had they simply assigned an equal probability to the outcomes they were trying to predict. Predictions made further out into the future were less accurate than short-term forecasts. The same was true for extreme predictions. Maybe the most surprising finding of all is the greater the level of expertise, the lower the accuracy of the forecaster. There was even an inverse relationship between how well forecasters thought they were doing and how well they actually did. Knowing a lot about a subject can actually make a person a worse forecaster than simply knowing a little. Experts do play a vital role in society in a number of ways, but predicting the future is not one of them.[15] Columnist Franklin Pierce Adams once observed, “Nothing is more responsible for the good old days than a bad memory.” Joe Granville may have had a bearish bent to his predictions because his father had bad memories of the worst crash of all time. His father was a banker who lost it all in the market crash during the Great Depression. Granville once said, “It wasn’t the market that did it. It was Wall Street. If he had followed what I teach, he’d have made $8 million on the Crash.”[16] End-of-the-world predictions, whether we’re talking about the actual world, the markets, or the economy, will always find an audience because negativity sells better than positivity to most people. Negative stories stick with us longer than positive stories. Look no further than the news every single day to understand this phenomenon. Good news and bad news play out over completely different time horizons because bad news happens fast while good news is gradual. As Bill Gates once said: “Headlines, in a way, are what mislead you, because bad news is a headline, and gradual improvement is not.” You can’t blame the news industry because it would sound odd if they reported more good news than bad news. The economist Max Roser once pointed out that the following headline could have been read every day for the past 25 years: This is an unbelievable achievement that no one cares about on a daily basis because it’s a process, not an event. The fact that we now live in a 24-hour news cycle has made it even harder for optimism to find its way into the news. Good news is incongruous with attention. Steven Pinker, a psychology professor at Harvard, has written extensively about the fact that (1) the world is getting better over time but (2) most people assume the world is getting worse. Pinker tells us why the market is so vast for pessimistic experts: Irrational pessimism is also driven by a morbid interest in what can go wrong – and there are always more ways for things to go wrong than to go right. This creates a market for experts to remind us of things that can go wrong that we may have overlooked. Biblical prophets, op-ed pundits, social critics, dystopian filmmakers and tabloid psychics know they can achieve instant gravitas by warning of an imminent doomsday. Those who point out that the world is getting better – even hardheaded analysts who are just reading out the data – may be dismissed as starry-eyed naïfs.[17] We look at an optimist as someone who’s stating the obvious while a pessimist is someone who isn’t wrong, just early. Pessimism feels more intelligent while optimism makes you feel like part of the intelligent crowd. On the late-night show Jimmy Kimmel Live, they used to do a bit called Lie Witness News where Kimmel would go out to Hollywood Boulevard and interview people on the street about current events. In 2014, he set out to find self-proclaimed soccer fans during the World Cup. Kimmel asked a number of people how US star Landon Donovan was performing during that year’s World Cup in Brazil. Here are some of the responses, again from people who claim to be huge soccer fans: “He’s good. He’s still got one more in him.” “I’ve seen him play way better in the World Cup so I know he’s underachieving right now.” The problem with their analysis is that Landon Donovan was cut from the US team before the World Cup even began. Donovan didn’t play a single match in the 2014 World Cup because he wasn’t on the team. To be fair, Kimmel’s production team likely set these people up by choosing the most confident of the bunch. I’m sure there are plenty of people who would say or do almost anything to get on TV. But research by behavioral psychologists and everyday experiences with almost any human being on the planet point to the fact that we all have the ability to be overconfident idiots at times. This is called the Dunning-Kruger Effect, which is the idea that we all have difficulty in recognizing our own incompetence in certain areas. Warren Buffett has laid out two simple rules for investing, “Rule Number 1: Never lose money. Rule Number 2: Never forget rule number one.” For the Dunning-Kreuger Effect the two simple rules go something like this: To overcome the fact that we can all act like overconfident idiots, Charles Darwin created a golden rule whenever he came across ideas that were inconsistent with his theories. Darwin would immediately write down those observations that were in conflict with his work to be able to see the other side in case he was wrong. In his autobiography, Darwin wrote, “For I had found by experience that such facts and thoughts were far more apt to escape from memory than the favourable ones.” Many groups of people these days are more concerned with winning than being right. It’s not easy because your brain will naturally fight news and opinions you don’t agree with, but having an open mind doesn’t cost you anything. Avoid people who look at the world through the lens of certainty, especially about the future. It’s always best to think about future events through a probabilistic lens. Forecasting expert Tetlock concluded in his study of experts by stating, “There is often a curiously inverse relationship between how well forecasters thought they were doing and how well they did.”[18] Predicting the future is an unattainable goal, but humility and self-awareness are both within everyone’s grasp.
Cognitive Dissonance
The Man Who Walked on Water
No One Knows What’s Going to Happen
Why Pessimism Sells Better than Optimism
Number of People in Extreme Poverty Fell by 137,000 Since Yesterday
The Value of ‘I Don’t Know’
Notes