The risk of certainty
An unsophisticated forecaster uses statistics as a drunken man uses lamp-posts ― for support rather than for illumination. ― Andrew Lang, Poet
Morgan Housel notes that, whether it be market movements or politics, “The market for unwavering, rock-solid opinions is bigger than the market for weighted probabilities… Confidence is easier to grasp than nuanced odds, and many analysts are happy to oblige.”
Yet, how many of those analysts foresaw Black Monday on August 8th 2015, when – after seven years of stellar economic growth – cheap debt and over-speculation in Chinese companies saw stock prices fall 8.5% in one day, and up to 30% three weeks later? Or the oil crisis of June 2014, which ended a decade-long boom and saw the price of crude drop from $110 to $50 a barrel? It is easy to feel confident when predicting a future that follows the current trajectory. But market history is littered with these “Black Swans”: unpredictable and unanticipated events with extreme consequences.
Even when one happens to be right, being early can be just as bad as being wrong. Michael Burry of Scion Capital predicted in 2005 that the US housing bubble could burst as soon as 2007, but a number of Scion’s investors withdrew their funds in protest over Burry’s view before he finally earned his remaining clients over $700 million through shorting credit default swaps. Why the investor revolt? Because they didn’t want Burry to be right. They didn’t want to miss out. They sought information that supported their chosen perspective. Ultimately, our willingness to believe something is most influenced by how strongly we desire – or fear – that prediction becomes a reality.
Black Swans need not be negative events. In the 1980s, who could have predicted that Costa Rica, one of the poorest countries in Central America, with an unemployment rate of 20% and consumer price inflation (CPI) of 90%, would by 2010 have a CPI of 10%, an unemployment rate of 6%, and boast one of the highest standards of living in South America?
In South Africa there is no shortage of talking heads on TV and prophets of doom on social media predicting the imminent implosion of Eskom, the flight of foreign capital and even an IMF bailout. Might these events occur? Yes. But it is pertinent to ask, too, if our fears are driving our willingness to accept certain narratives, and what the ultimate cost of believing those narratives could be: namely, that they become self-fulfilling prophecies. Sociologist Robert K. Merton’s description of the term bears mentioning:
The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behavior which makes the original false conception come true. This specious validity of the self-fulfilling prophecy perpetuates a reign of error. For the prophet will cite the actual course of events as proof that he was right from the very beginning.
To stimulate savings, investments and growth, a symbiotic relationship between government, the corporate sector and citizens is needed. We saw this in Chile in the 1980s, for example, where the Chilean government established a national pension fund and made saving for retirement mandatory. Additionally, when an individual resigned, their pension fund contributions remained invested in the fund until their retirement. (By contrast, in South Africa, individuals are permitted to withdraw all of their retirement savings when changing jobs.)
From the 1980s to today, Chile went from being a vanguard of big government with a tightly controlled economy to leading free market economic reform in South America. In the 1980s the Chilean economy was in a state of crisis. Almost one in three people could not find productive work in the private sector. Hernán Büchi Buc, Chile’s Minister of Finance (1985 – 1989), credits this state of crisis and a sense of urgency with uniting and mobilizing the country. Between the mid-1980s and 1997, Chile grew its economy at annual rate of 7.2%. Chile achieved this through a number of reforms, most notably opening their economy, privatizing certain state corporations, and maintaining tight monetary policy and fiscal disciple, which tempered inflation. Buc cites the following reforms as key to Chile’s success:
- An open trade policy,
- A strong private sector,
- A coherent plan,
- A favourable environment (social support to protect families, and laws and institutions that supported economic policy) and,
- A culture that fosters growth.
Vast ills have followed a belief in certainty ― Peter L. Bernstein, Against the Gods
A developmental path is often uncertain and hotly contested. There is no simple solution, no one-size-fits-all approach. But we are not short on ideas: the National Development Plan offers a clear vision and path to growth. Now is the time to stop trolling politicians on Twitter, acting as prophets and agents of our own demise, and to roll up our sleeves and get the hard work done. We’ve done it before.
In a recent article, Patrick Cairns reminds us that in 1994, economic growth in South Africa had averaged 0.2% since 1990, inflation had been above 10% since 1980, and we had a debt to GDP ratio of almost 50%. Despite seemingly insurmountable challenges, by 2000, inflation and debt were well in hand and economic growth had risen to 2.5%. We must do it again.