Category

Psychology

The Narratives That Drive Bubbles

By | Economics, Psychology

Tesla recently cut the price of its sport utility vehicle Model Y by $3,000, just four months after its launch, in an effort to maintain sales momentum during the COVID-19 pandemic. This reduction follows price cuts in May on Tesla’s Model 3, Model X and Model S.

Tesla has seen its value skyrocket in recent quarters, rising from a 52-week low share price of $211 to a high of $1,794.99 made on July 13, 2020. That figure, however, is low in the eyes of some. According to a recent report by Piper Sandler, they cite two key factors for their new Tesla price target of $2,322: The company’s edge in manufacturing and resulting unit volume, and the “possibility” that software will allow the company to “eventually” generate operating margins in the mid-20s, currently at 4.7%!

When valuations are so removed from the fundamental value of assets they are considered in a bubble. The hysteria and destruction created by asset bubbles should be something that people have come to be familiar with. In the past twenty years we have experienced the large boom bust bubble of the dot com era and then again in 2008 with the subprime mortgage crisis.

There are many possible causes of these bubbles such as; moral hazard, herding, greater fool theory, extrapolation, or liquidity, but once they expand they are driven by narratives because it is the narrative that infects and influences investors. Economist Robert Shiller once said that the stories investors tell themselves drive their investment thesis, which drives their reason for putting money to work in an economy. They are usually not making rational, cool-headed decisions based upon careful and cautious fundamental analysis. 

The larger theme narratives that seem to be prevailing and driving markets are the Federal Reserve, US/China relations and trade, the pandemic (with its alternating themes of lockdown and vaccines), and the coming US elections. You would think just one of those narratives to be highly influential but you get the full force of the four.

Sometimes a sector is a narrative. Think cannabis stocks or tech stocks in the 1990s — one of the most inflated and irrational bubbles the market has ever seen. Companies with no profits and high expenses were going public. Of course, the bubble burst spectacularly in 2000. The poster child of the promise of growth was pets.com, an online pet food and pet care product retailer. The company lasted about a year. The more product it sold, the more money it lost. We could equate that with today’s gig economy and stock sector. Do you know any stocks like this? (cough – UBER)

There are also individual stock narratives that are just as powerful. Fitbit jumped out to an early lead in the wearable fitness market, an area that many experts believe would see explosive growth in coming years. However, Fitbit’s share price dropped from its IPO price of $20 back in 2015, to shares that now trade at around $6.8. 

Like Fitbit, GoPro is another example of how the narrative drives a company’s stocks to heights that don’t reflect reality.  GoPro’s IPO priced at $24 back in 2014. Today, shares trade at around $4.83.

Sometimes, investors don’t even take the time to develop the full narrative. In 2016, Pokemon GO conquered the world and sent Nintendo’s stock surging. Their stock price rose by over 50 percent, gaining over a billion dollars a day. It totaled over $10 billion in less than a week. There was one problem, Nintendo didn’t actually make Pokemon GO. 

Once the Nintendo spokesperson publicly reminded everyone that the game is made by a different company, the stock price plummeted by more than 30 percent. This “discovery” could have been revealed by a simple Google search or a play-through of the first two seconds of the game. 

When valuations don’t make sense it is the narrative that drives the stock. Everyone loves a story that they can believe in. The fundamental problem with story stocks is their prices are typically bid up by investors who have gone ga-ga over the story. As a result, they often trade much higher than they should relative to their profits, given the financial fundamentals of these companies.

In 1999, Howard Marks of Oaktree Capital Management, wrote in his piece “bubble.com” that “tech stocks had benefited in 1999 from a boom of colossal proportions. They exhibited all of the elements of a market bubble, with an attractive story providing the foundation for a gravity-defying escalation of prices far beyond reason, and for manic behavior on the part of investors.” He urged readers to view the tech stocks skeptically, but also acknowledged that it’s possible for overpriced assets to remain so for a long time. However, at the time he said that he certainly had no idea that the excesses he saw in the market would be remedied as quickly as they did. He also  added that “analysts added little insight in terms of either fundamentals or valuation.”  

In 2019 Tesla sold 367,500 units. In comparison, Toyota sold 10.7 million units. Tesla now has a greater market value than Toyota. Fundamentals or Narrative driven? You be the judge. 

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The Great Divide Between Cause and Effect

By | Economics, Psychology

Cause and effect is the principle of causality, establishing one event or action as the direct result of another or where the cause is partly responsible for the effect, and the effect is partly dependent on the cause. 

We often look towards correlations in order to identify and resolve cause and effect relationships and there are so many. Is obesity (the effect) directly related to the consumption of fast food (the cause)? Or is obesity related to the fact that people with limited disposable income can only afford to eat at fast food establishments? Or is obesity the result of poor education that leads to poor paying jobs that result in limited disposable income which provokes people to choose affordable fast food outlets?

There is a further complication in that, “Correlation does not imply causation.” Just because two trends seem to fluctuate in tandem, doesn’t prove that they are meaningfully related to one another. As an example we can look at the correlation between the per capita consumption of chicken to total US crude oil imports.  

The Hutch ReportCorrelation is something which we think, when we have limited information at our disposal. So the less the information we have the more we are forced to observe correlations. Similarly the more information we have the more transparent things will become and the more we will be able to see the actual casual relationships. 

As humans, we generate and evaluate explanations in a very spontaneous manner. In fact, to do so is fundamental to our sense of understanding. We don’t like uncertainty and ambiguity. From an early age we respond to issues of uncertainty by spontaneously generating plausible explanations. In our rush for an explanation, we tend to produce fewer hypotheses and search less thoroughly for information. We are more likely to form judgments out of first impressions and fail to account enough for situational variables. This happens very often amongst economists and “may” explain why they are so often wrong in their conclusions. 

As an example, central banks believed that accommodative monetary policies would encourage banks to extend credit to borrowers. Available information regarding lending decisions pre- and post- negative interest rate policy (NIRP), however, indicates that banks did not increase their marginal propensity to lend. Instead, the suppression of rates on behalf of the central banks narrowed banks’ net interest margins and thereby discouraged credit expansion. Loan growth in Europe and Japan has remained weak and, despite the significant rally in global equity markets, bank stocks did not fare better after the arrival of NIRP. This example in itself is vastly over simplified as there are a number of issues that may have played a part in coming to this conclusion. 

So if this is really the case where we, as individuals, tend to jump to conclusions, spontaneously generate plausible explanations or find correlations where there are none, how can we be certain that our leaders, bankers, managers, the media etc, are not doing the same thing?

The general public is provided little to no insight into the detailed thought processes that go into many governmental decisions. How do we know our officials have considered all the angles and come to the best decision possible? All we are given is their decision and a political sound bite designed to provide the appearance of an explanation. We buy into these explanations because they provide us with a sense of certainty. 

If we look towards current events, we see that we are now experiencing an unprecedented level of income inequality in the country but what is the cause of this effect? It forces us to go back into a vicious cycle of thought where we once again are prone to jump to conclusions, explanations with limited information etc. 

To better understand the complexity of these issues you can try coming to your own conclusion with the use of the Five Whys technique. The five whys is an iterative interrogative technique used to explore the cause-and-effect relationships underlying a particular problem. As an example we have taken the recent riots and just brainstormed through the exercise. This doesn’t mean to say we have come to the proper conclusion or have exhausted all the whys, but you can see how finding causality can quickly become a complex issue. 

Effect: Riots

Why? – People are frustrated and are lashing out

Why? – They lack opportunities, equal opportunities and income / they are drowning in debt / injustice

Why? – Available jobs pay low salaries / expenses are increasing / fewer job opportunities / people living beyond their means / inequalities within the justice system

Why? – Increased productivity through technology has led to layoffs / poor levels of education

Why? – Management compensation is linked to increased shareholder value / Decrease costs and increase profits anyway possible / broken education system

If anything, this should persuade you to look deeper into our current state of affairs, question everything you hear and not to assume the explanations that you are being fed are anymore accurate than what you could conclude on your own. The divide between cause and effect is greater than you can imagine. 

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Where does the stock market and economy meet?

By | Economics, Markets, Psychology

This idea of buying and selling stock in a company was originated by the Dutch in 1602. As the practice spread to other countries the volume of shares increased.  At this point the need for an organized marketplace to exchange these shares became necessary. The modern concept of a stock market took hold in England where traders would meet at a London coffeehouse.  In 1773, the traders took over the coffee house and changed its name to the “stock exchange.” The first exchange, the London Stock Exchange, was thereby founded. The idea made its way to the American colonies with an exchange started in Philadelphia in 1790 and eventually the New York Stock Exchange in 1817. 

The term Stock is used to symbolize an investor’s ownership in a company. Upon purchase of the stock the investor theoretically owns a percentage of everything the company owns or owes. The company’s profitability, or lack thereof, determines whether its stock is traded at a higher or lower price. The practice began as many pioneer merchants wanted to start huge businesses. This required substantial amounts of capital. It was an amount of capital that no single merchant could raise alone. Therefore, groups of investors pooled their savings and became business partners and co-owners with individual shares in their businesses to form joint-stock companies.

Psychological effects

The US economy’s GDP is primarily driven by spending (70%) and investment (18%). The stock market affects gross domestic product primarily by influencing financial conditions and consumer confidence. This confidence spills over into increased spending, which can lead to major purchases, such as homes and automobiles and thereby increase the GDP.  So, when the value of stocks are increasing there tends to be a great deal of optimism surrounding the economy and the prospects of various stocks. In comparison, when the value of stocks are falling, it can have a negative effect on sentiment at which point investors rush to sell stocks to prevent losses on their investments. Those losses typically lead to a pullback in consumer spending, especially if there’s also the fear of a recession (two quarters of negative growth). When GDP rises, corporate earnings increase, which makes it bullish for stocks. The inverse occurs when GDP falls, leading to less spending by businesses and consumers, which drives the markets lower. At least that is the theory. 

Todays reality

Looking at the extraordinary events of today, the stock market looks increasingly divorced from economic reality. The United States is on the brink of the worst economic collapse since the Hoover administration. Corporate profits have crumbled. To date more than 1.8 million Americans have contracted the coronavirus, and hundreds are dying each day. Add to that the death of an unarmed man at the hands of a police officer which has led to daily and nightly protests, widespread anger and looting in cities across the country. You would think that would be enough to destroy consumer confidence. 

However, stocks keep climbing. The coronavirus crisis has cost some 36.5 million American jobs in two months with experts warning that figures could peak above the Great Depression in 1933, yet Nasdaq is less than 1% from its all time highs set back in February and the S&P 500 is down a mere 9 percent from its all time highs.

Economists who have studied the performance of stock markets over time say there’s relatively little evidence that economic growth matters to the outcome of the market at all. According to Ed Wolff, an economist at New York University who studies the net worth of American families, “Stock ownership among the middle class is pretty minimal.” He stated that “The fluctuations in the stock market don’t have much effect on the net worth of middle-class families.” A relatively small number of wealthy families own the vast majority of the shares controlled by U.S. households. According to an analysis by Wolff the most recent data from the Federal Reserve shows that the wealthiest top 10 percent of American households own about 84 percent of the value of all household stock ownership. The top 1 percent controlled 40 percent of household stock holdings.

Ok, this may be true but it still doesn’t take into account the psychological impact of the consumer previously presented. Even if US households own very little stock, the effects of the events we are currently experiencing are putting the brakes on consumer spending. This is already leading to a large number of insolvent businesses. This has a profound impact on GDP and will eventually impact the stock market. Or will it?

Much of the effect of the rising stock market has been explained as the effect of the money printing by the Fed. The theory is the Fed prints money, drives down interest rates which push investment into riskier assets thereby driving up the stock market. There is also the moral hazard effect whereby investors take on additional risk because they believe that no matter what happens the Fed will bailout the markets. 

The Federal Reserve President, Jerome Powell recently explained that in a liquidity crisis, otherwise healthy firms collapse because they can’t access credit. The Fed can resolve such a crisis because it can print and lend unlimited amounts of money. However, in a solvency crisis, companies can’t survive no matter how much they can borrow: they need more revenue. The Fed can’t solve that.

FEBRUARY 12: Federal Reserve chairman Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee on the “Semiannual Monetary Policy Report”
on Wednesday, Feb. 12, 2020. (Photo by Caroline Brehmanl)

So, despite its critical role in the economy, the stock market is not the “same” as the economy. The stock market is driven by the emotions of investors. They can exhibit irrational exuberance which normally occurs during an asset bubble and the peak of the business cycle. Equally we have seen that consumer optimism or lack thereof can impact spending, which makes up 70% of GDP, and also has an effect on stock market performance. So what we essentially have is a situation where investor exuberance is battling underlying deteriorating fundamentals. So far investor exuberance is winning, up until they take Jerome Powell’s words of caution that the Fed has no solution for business insolvency. So the stock market is not the economy but it is influenced by the economy. 

Musical chairs

John Maynard Keynes probably explained it best. According to Keynes, the stock market is not simply an efficient way to raise capital and advance living standards, but can be likened to a casino or game of chance. “For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs–a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops.”

The Ticking Trust Bomb

By | Economics, Psychology

Of all the principle forces that hold our world together the one that acts as the glue of society is called trust. Trust is what keeps relationships in tact by allowing people to live together, work together, feel safe and belong to a group. Trust in our leaders allows organizations and communities to flourish, while the absence of trust can cause fragmentation, conflict and war.

Confidence is the feeling or belief that one can have trust in or rely on someone or something. When trust deteriorates so does confidence, and it is more prevalent in our functioning society than people realise.

Think about the simple act of driving a car. The reason why we even get in one at all is because we have a high level of confidence that the car driving towards us on the same road, at 100km an hour, will not suddenly cross over into our lane and cause a deadly head on collision. 

Think of airplane travel. Everytime we decide to fly we have confidence in the ability of the pilot to get us from point A to point B safetly. Yet on 24 March 2015 the passengers of a Germanwings aircraft were deceived. The Airbus A320-211, crashed 100 km (62 mi; 54 nmi) north-west of Nice in the French Alps. All 144 passengers and six crew members were killed. It was Germanwings’ first fatal crash in the 18-year history of the company. The investigation determined that the crash was caused deliberately by the co-pilot, Andreas Lubitz, who had previously been treated for suicidal tendencies and declared “unfit to work” by his doctor. Lubitz kept this information from his employer and instead reported for duty. Shortly after reaching cruise altitude and while the captain was out of the cockpit, he locked the cockpit door and initiated a controlled descent that continued until the aircraft impacted a mountainside.

Following the incident, Lufthansa and Germanwings said that the crash has not had an impact on booking numbers and many analysts expected only a brief short-term hit and then demand to recover quickly. 

So as catastrophic as this event was, it did not deter millions of passengers from taking a flight that same day or any other following day. So this prompts the question, “How much deception and mistrust does a person have to endure before they lose confidence in that something or someone?” 

We find ourselves in a situation where trust seems to be deteriorating on a number of levels. There is lack of trust in the government, news organizations, international organizations, science, banks, business leaders, health organizations and the list goes on. In fact, seeding distrust among the masses has proven to be an effective weapon against others. But we can’t identify the tipping point.

The financial crisis of 2008 battered the level of trust of the population in their financial system. That loss of confidence created a run on many banks and spawned “Occupy Wall Street.” Eventually the leaders managed to regain a certain amount of trust for the financial system to start working again. The anger dissipated and the Occupy Wall Street movement disappeared. However, confidence in the system was weakened and that distrust and skepticism in our leaders to do what is in the best interest of the population still remains today. 

Seeing bankrupt company leaders receive enormous bonuses, or watch the Federal Reserve state how strong the economy is while justifying printing trillions of dollars to support it are contradictions that are not going unnoticed. In fact, it just slowly adds to the current level of distrust in these institutions.

According to Edelman’s Trust Barometer, 66% of those surveyed do not have confidence that, “Our current leaders will be able to successfully address our country’s challenges.” 

The Hutch ReportWe began by saying that trust and confidence are essentially what keeps our society glued together. What we don’t know is how much confidence and trust has to be lost before society becomes unglued. That lack of information makes the potential for disaster that much greater. 

I was speaking with a fund manager recently about the current actions of the Federal Reserve, bankers and our leaders in general.  I asked him what worried him most. He told me his biggest fear was the next potential crisis which promises to be the greatest crisis of all…..a crisis of confidence. 

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The Game of Financial Market Predictions

By | Finance, Psychology

As humans have evolved, the ability to predict events days, months or years into the future has never been relevant to survival. Rather, our DNA has been equipped with the fight or flight response. It is our quick ability to react to the event once it has happened that keeps us safe. 

Speaking on a panel at the 2018 NeuroLeadership Summit, social cognitive neuroscientist Kevin Ochsner said, “Our brains evolved to manage the needs of the now and of the not-too-distant future—your immediate environment, and short-term goals for food, water, shelter, and child-rearing.”

Although the world has evolved, humans still carry the same neural architecture as our early ancestors, which means that our brains are still inept at predicting future events. The closest we get is our ability at using sensory data to foresee events in the immediate future, as in microseconds. This enables us to predict the trajectory of a fast-moving baseball which enables us to catch it. 

In his fascinating documentary series, “The Brain”, Stanford Neuroscientist Dr. David Eagleman explains how in practice predictability is impossible. He demonstrates this by dropping a single ping pong ball into a container of one hundred and fifty ping pong balls. It is possible to correctly identify where the ball will land but as it sets off a chain reaction of movement with the other balls the situation becomes more complex. He states, “Any error in the initial prediction, no matter how small, becomes magnified as balls collide and bounce off the sides and trigger other balls. Soon it becomes completely impossible to make any kind of prediction about how the balls will end up. The balls have no choice in the direction they move. They have no freedom to do it differently, and yet the system is completely impossible to predict.”

A human’s thoughts, feelings and decisions emerge from the innumerable interactions in the brain. In comparison to the activity of one hundred and fifty ping pong balls, the brain has billions of times more interaction every second and never stops during a lifetime. In addition, each individual’s brain is embedded in a world of other people’s brains. Dr. Eagleman goes on to say, “the neurons of every human on the planet fire, interact and influence each other creating a system of unimaginable complexity. This means that even though brains follow predictable rules, in practice, it will always be impossible to know exactly where any of us are going.”

Nassim Taleb developed a line of argument throughout his previous books, Fooled by Randomness, The Black Swan and Antifragile,  that the defining characteristic of future change is that it is impossible, and pointless, to try to predict it. Instead,  he argues, it is essential to make peace with uncertainty, randomness and volatility. Those who do not — who insist not only on trying to predict the future, but also on somehow trying to manage it — he disparagingly calls “fragilistas.”  

So if predictions are impossible, what makes such a large number of financial professionals believe they have the ability to identify, as in Dr. Eagleman’s demonstration, the correct outcome of the millions of interactions that are set off from the chain reaction of one event? 

The human brain values certainty in a very similar manner to how it values food, sex, and social connection. Certainty offers a perceived control over the environment that is in itself inherently rewarding, the brain treats uncertainty, and the inability to predict the future, as a source of deep discomfort.

This is essentially why viewers continue to tune into their favorite financial tv personalities, in the hopes that they will describe the future and give them a greater sense of certainty. The main certainty on behalf of the financial tv personalities is that regardless of their faulty predictions, they are protected by a number of disclaimers at the end of the show that viewers tend to disregard.

The Financial Times looked at the number of countries that the IMF expected to be in recession for every year since 1991 and compared it with the number of economies that turned out to have actually contracted. Over the last 27 years, the IMF predicted every October that an average of five economies will contract the following year. In practice, an average of 26 have contracted. The difficulty in getting forecasts right is not unique to the IMF. “All macroeconomic forecasters are poor at predicting downturns,” David Turner, head of the economics department at the OECD told the Financial Times.

The past is littered with a multitude of failed predictions over the years made by economists, financial analysts, TV financial personalities, or the Federal Reserve. 

Who can forget on March 11, 2008, Mad Money host Jim Cramer told a viewer who wrote into his show, “Bear Stearns was fine!” right before the stock absolutely collapsed. The stock was trading at $62 per share. Just 5 days later, the firm was picked up by JPMorgan Chase for $2 per share. Yet, Jim Cramer is still on CNBC shelling out predictions daily to a mass of viewers eager for some kind of certainty.  

In the past, there have been correct predictions. Although with no real timing accuracy, they can be considered a lucky guess, since none have been able to replicate the predictions that made them famous.

Elaine Garzarelli became a start with her prediction of the 1987 crash. Since then, her record was mixed. For instance, on July 23, 1996, she told clients that US stocks could fall 15% to 20% from peaks reached earlier that summer. The Dow Jones industrial average closed that day at 5,346.55, and had risen 45% by Nov 1997.

Elaine Garzarelli

Meredith Whitney catapulted to fame after her prescient October 2007 report on Citigroup Inc. and put this previously unknown analyst on the cover of Fortune magazine. Following shortly after her ascent to prediction stardom, she predicted an “as yet unrealised” meltdown in municipal bonds in a 2010 interview on “60 Minutes.” A short-lived hedge fund followed, but the fund lost money and closed in 2015 amid a legal dispute with its anchor investor.

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Meredith Whitney

Paul Tudor Jones also called the 1987 crash, yet last year predicted that the US 10-year Treasury yield would rise to a “conservative” 3.75 percent by the end of 2018. The result? It closed the year at 2.43 percent and has since dropped to 1.73 percent. However, the ability to make predictions should not be confused with one’s ability to react and trade off of events. It is the trading ability of PTJ, his ability to react to situations, and trade accordingly that has made him wealthy.

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Paul Tudor Jones 1987

Bob Johansen, author of Leaders Make the Future: Ten New Leadership Skills for an Uncertain World, states that the first step is to strive not for certainty, but for clarity. Given that the future is inherently unpredictable, we can never be certain about what the future will bring. 

If we really had the ability to forecast future events, there would be no such thing as an unforeseen crisis!

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Focus on the Positive or Negative?

By | Psychology

Telling someone to focus on the negative may sound strange and counter to what we are used to hearing, particularly from a positive mindset self help industry that generates revenues of $10 Billion a year.  However, the statement does have some merit. The main distinction to make is the difference between focusing on the negative and “dwelling” on the negative. 

Our minds produce negative thoughts for good reason and are often necessary for our well-being and mental health. Negative thoughts are meant to alert us to the things that need attention. Focusing on these negative thoughts centers our attention on things that we need to adjust or change. 

The survival value of negative thoughts and emotions help explain why suppressing them is so fruitless and in fact can produce adverse effects. The act of suppressing thoughts and feelings can be bad for our physical health and cause stress. According to psychotherapist Tori Rodriguez, suppressing thoughts means we cannot accurately evaluate life’s experiences. If we don’t allow ourselves the lows, then the satisfaction from the highs becomes lessened and “attempting to suppress thoughts can backfire and even diminish our sense of contentment”.

So does this mean stop focusing so much on the positive? Not at all. We need to focus on the positives when it is the most useful thing to do, as we need to place our focus on the negative when necessary. Negative thinking isn’t superior to positive thinking, but neither is positive thinking the panacea for all your ills. Sometimes what’s required is a dose of reality. And it’s the negative thinkers, the ones who are perceived as meddlesome and troublesome and annoying, that often provide the cure. 

Negative thoughts are often a means of protection, reflection and learning. Julie Norem wrote in “The Power of Negative Thinking” that negative thinking has the ability to transform anxiety into action.” By imagining the worst-case scenario, defensive pessimists motivate themselves to prepare more and try harder.”

It is therefore very useful for us to focus on negative information you would never be able to learn from your mistakes. Concentrating on the process and not the outcome is one way to focus on the negative while avoiding dwelling on it. Remember that failure is necessary. Embrace the idea of failure as a learning barometer, focus on the negatives, make adjustments and you can move on.  

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Expert-Tease

By | Education, Psychology

We seem to have an ever increasing amount of experts online which begs the question, “What classifies a person as an expert?” The Oxford Dictionary defines expert as “A person who is very knowledgeable about or skilful in a particular area.” However, the big challenge with this definition is quantifying “very knowledgable”. According to Psychology Today, “it turns out surprisingly difficult to provide a formal definition that everybody can agree with.  There are in fact many definitions, but most are unsatisfactory.” The lack of a reliable measure of expertise has enabled a large number of people to consider themselves experts in their chosen field. We call them “self-proclaimed” experts. 

In today’s digital economy there are literally hundreds of thousands of pieces of user-generated content published every minute. It is inexpensive and quick to create a video, write an article or produce a podcast. With the evolution of social media that number continues to grow exponentially. It is believed that 90% of the worlds data has been created in just the past 2 years.

With so much content and less time to filter through it all, people are overwhelmingly seeking out “experts” and high impact content to help them make purchase decisions, investment decisions, career choices, travel choices or even relationship decisions. The label of “expert” is powerful and weilds influence. In an  article in Forbes Magazine a study performed by Nielsen showed that expert content was 88% more effective in creating brand lift than a brands’ own content. It was also learned that expert content was the most influential at every point in the new buyer’s journey. However, more often than not, people are ignoring the fact that not everyone that writes articles, makes videos or produces podcasts is an expert.

The average content consumer has the challenge of determining what is real from fake, correct from false or simply what content can be trusted. They need to determine for themselves who is an expert versus who is just an online user creating content. But does that get determined at the site level or is there some sort of advanced criteria that you can run someone against to determine whether or not they are really credible in a particular area and moreover if they are an expert?

Financial television personalities such as Mad Money’s Jim Cramer provide investment advice on a daily basis. The efforts previously made to actually quantify the performance of his picks, here, and here, found that the results have been less than flattering. It is for this reason that most of these financial programs will flash a disclaimer at the end, which essentially removes them from liabilites that may arise from investors losing money following his expert recommendations.

“All opinions expressed by Jim Cramer on this website and on the show are solely Cramer’s opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL or their parent company or affiliates, and may have been previously disseminated by Cramer on television, radio, internet or another medium. You should not treat any opinion expressed by Cramer as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Cramer’s opinions are based upon information he considers reliable, but neither CNBC nor its affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Cramer, CNBC, its affiliates and/or subsidiaries are not under any obligation to update or correct any information provided on this website. Cramer’s statements and opinions are subject to change without notice. No part of Cramer’s compensation from CNBC is related to the specific opinions he expresses.”

One explanation of our will to follow these experts is the Authority bias. Authority bias is the tendency to attribute greater accuracy to the opinion of an authority figure (unrelated to its content) and be more influenced by that opinion. This concept is considered one of the so-called social cognitive biases or collective cognitive biases. 

Our digitally driven world has led us to become less patient and lazy. Therefore the deference to authority can occur in an unconscious fashion as a kind of decision-making short cut. This is not to say don’t follow experts, just don’t be teased by the term expert. There are obvious domains where experts are not just the product of a society exercise in labeling (just try conducting a brain operation, teaching a class in Physics or compete in the Olympics). 

While there is no 100% foolproof way to tell between an expert and their “self-proclaimed” counterparts, there are some simple things readers can do if they are seeking to assure that their expert content really comes from an expert. Consider the source, check the facts,  and research the author.

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The Top 10

By | Psychology

If you are like most people these days then you probably have lost your sense of discovery and prefer to rely on the opinions of others as you roam the endless roads of social media. That is why Top 10 lists of everything from chocolates to music attract so many readers. It is essentially because they feel that somehow these cyber strangers are more qualified to provide opinions than they are.

The previous statement is of course false.  The truth is everybody has an opinion about what they like and what they prefer. The great jazz pianist Bill Evans, when speaking about jazz as an art form, disagreed with the premise that the neophytes opinion was less valid than the jazz musician who knew all the ins and outs of the art form. He believed that one could even say that the neophyte’s opinion was even more valid because he was listening to the music without being weighed down by all the other analytical additional knowledge flowing around the musician’s head. 

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You can argue the point that the more you experience something the higher your point of reference becomes, which would make you more critical of something, but you can’t tell somebody that their particular opinion of a piece of music is wrong when they are speaking from their personal point of reference. 

This is the issue about creating Top 10 or Top 100 lists about things that are subjective to the individual. Even if you have 99 people all preferring one piece of music to another, but one person in the bunch does not like it for whatever reason, it can’t be quantified. Compare this example with comparing the strength of different pieces of material. You can state the Top 5 strongest materials on earth because their strengths can be quantified. This objectivity makes for a valid comparison between them. 

So why do people feel the need to latch on to somebody else’s list of the greatest Rock Groups or greatest whatever? Often the answer is certainty. Rather than have to listen to 100 albums and make the distinction themselves, they take the list and discover the best in hopes of saving time or having to slave through something painful. They become more comfortable in the fact that they will be listening to what they would have chosen anyway. 

In addition to wanting to feel certain about something, there are those that exhibit different cognitive biases that affect their opinions. An example of this is the courtesy bias – the tendency to give an opinion that is more socially correct than one’s true opinion, so as to avoid offending anyone. Therefore, you can imagine how many of these Top 5, 10 or 50 lists are based on nothing more than wanting to appease the reader. Pick out the most widely held views about something in order not to offend anybody or look bad themselves. 

There is also the authority bias – the tendency to weigh the opinion of an authority figure more heavily. A good example of authority bias is the recent explosion of bloggers writing about their world travels. They present themselves as the best source of information about what to see or where to visit. I happened to come across an article by one of these well known bloggers that described why he would never visit Vietnam again. He proceeded to express his distain for the people he met and how he was ripped off etc. Anybody following his advice would have sabotaged an opportunity to experience it for themselves. I did have the opportunity to experience a visit to Vietnam not too long after I came across that article. My experience was vastly different. It was one of the most fascinating countries I have visited. 

Not everybody is comfortable giving their true opinion of something, so they prefer to accept the opinion of others. This is called the “Bandwagon effect” – The chance of people adopting certain ideas or making decisions increases when more other people have made these same adaptations or choices. Underlying mechanisms of this cognitive bias are people’s need to conform to a group norm, and the use of other people’s choices as information for making your own choices.

Subjectivity refers to personal perspectives, feelings, or opinions entering the decision making process. Objectivity refers to the elimination of subjective perspectives and a process that is purely based on hard facts.

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Next time you take a look at a Top 10 list, pay attention to how it is worded. Is it “The Top 10 Places to Visit on Earth,” or is it “My Top 10 list of places,” or something similar. Because there are so many of these lists now produced and many of them have caused disagreements and agressive feedback, as you would expect them to. This is what happens when dealing with subjectivity. You are probably more likely to see the addition of the phrase, “as selected by our readers,” or based on votes from “critics” or “industry experts” which falls into the authority bias category. 

We previously wrote about how our sense of discovery has been lost. Too many people are now relying on a social media stranger’s opinion, or even Google’s opinion. Do yourself a favour and just enjoy the process of discovery. At the least, create your own Top 10 things to eat, to visit, to do, to listen to. After all, your opinion is the one that matters most. As you expand your horizons and make new discoveries you will most likely find that all those list slowly change over the years to reflect your most recent experiences. 

The Hutch Report

Energy – Social media’s missing link

By | Psychology, Technology

Have you ever walked into a room of a small group of people and felt a blast of negative energy?  Everything looks normal enough but you have an uneasy feeling. Later you find that a couple among the group have been arguing. You were not aware of the reason at the time you entered but you felt the presence of negative energy well before you even knew what was happening.

Equally, you may have met somebody who affects you in a positive way. They are fun to be around. They tend to make anybody that comes in contact with them feel good. They have a way of emitting positive energy. We have seen that by adapting a lifestyle that leads to emotional and physiological balance you may have a positive influence on all others around you. If not, the opposite becomes true.

So how does this apply to a world where people have become accustomed to communicating with each other by distance, through smartphones and texting? If we can no longer sense the presence of the person we are speaking with, are we truly connected? Mark Zuckerberg wrote in 2017 for the first Facebook Community Summit, “For the past 10 years, our mission has been to make the world more open and connected. We will always work to give people a voice and help us stay connected, but now we will do even more. Today, we’re expanding our mission to set our course for the next 10 years. The idea for our new mission is: Bring the world closer together.”

This prompts the question, “Does a world connected by smartphones, web interfaces, false personas and anonymity constitute a world that is more open?”

Zuckerberg continues, “I always believed people are basically good. As I’ve traveled around, I’ve met all kinds of people from regular folks to heads of state, and I’ve found they almost all genuinely care about helping people.” Ironically, Zuckerberg opted to travel and meet these “regular folk” in person, when he could have quite easily struck up a conversation with them via their facebook page.

He goes on to say, “We all get meaning from our communities. Whether they’re churches, sports teams, or neighborhood groups, they give us the strength to expand our horizons and care about broader issues. Studies have proven the more connected we are, the happier we feel and the healthier we are. People who go to church are more likely to volunteer and give to charity — not just because they’re religious, but because they are part of a community.”

The groups and communities he is describing are those that meet up personally to share thoughts and ideas. Meetings where they share the experiences together in the same location as opposed to sharing it through a text message. They are sharing each other’s company. They generate energy and nurture others as others generate energy and nurture them.

Ironically, what some may see as a connected world, others see as a world of human’s becoming more distant and isolated. Communicating with others via technology removes that energy that we all share when we speak with someone face to face. You do not get a sense of a person’s energy through a text message or tweet. You are not able to read the body language. As human’s, we communicate with the tone of our voice, our body language, our eyes etc. We communicate on many different levels.

Some call this intuition yet others believe that we, as humans, create energy and have the ability to transmit that energy, be it negative or positive. Any thought, intention or action triggers an emotion which gives rise to this energy. Our thoughts and memories are essentially energy.

Energy released by an angry individual is shared with all people including plants, animals, and objects that he or she comes in contact with. This is how the negative or positive energy gets passed on from one person to another. You can feel that loss of energy yourself when you fall ill. Negative energy robs you from your vitality and wellbeing, while positive energy rejuvenates, and keeps you in a state of joy, happiness and good health.

Social media claims to be connecting people but to what extent? Isn’t it a purely superficial connection void of any real feeling? Social media has its place but nothing is a replacement for human contact. Human contact and energy seems to be the missing link in our newly “connected world.”

The Hutch Report

Learning from Google’s Mistakes

By | Education, Psychology

Everybody uses Google’s search engine daily, however, in addition to using their tools people should be learning from what Google does as a company, especially when it comes to failure.

When kids are learning to speak, walk, or do most of the actions we take for granted as adults, they are never impeded by the fact that they have previously failed their attempts. They just keep modifying their actions until they succeed.  So why and when does this change?  At what age do we suddenly have the realization that if we don’t do things perfect, we are less of a person?

You never hear a parent say to a baby as it is learning to walk, “You fell again, what’s the problem with you?” Unfortunately, at some moment this behaviour changes. You can see it on thousands of baseball little league fields, hockey rinks, basketball courts, singing contest, dancing contests, etc. A boy drops the ball and suddenly hears it from his coach, his teammates or some stranger in the stand yelling, “Bench that kid!” This instills the thought that we are not allowed to make a mistake.  That is a lot of pressure to put on anyone.

We don’t consider this kind of behaviour as the norm because we know that there is a large amount of support from parents and educators. There are a number of companies and researchers looking to improve and discover new approaches to learning and teaching. However, the desire to win at all cost does often override the desire to accept one’s mistakes, embrace them and learn from them.

The problem is not failure in itself; it is how people perceive failure. It is how we are conditioned to deal with failure.  Just the sound of the word seems to evoke the connotation of something less than whole, something weak or bad. Of course it doesn’t feel great to be performing in front of someone and make a mistake.  Somehow it makes us feel inferior or less than perfect. But therein lies the negative perception. Quite often that fear of failure works negatively on our nervous system, which in turn decreases our chances of performing at a peak level.

If one can change their perception of failure or their definition of what it means to fail then there is probably a greater chance that they improve more rapidly and their chance of success in whatever endeavour they choose. In addition, they enjoy the process.

The classic example of someone’s positive perception of failure is that of Thomas Edison. When asked how he dealt with so many failures in trying to find the right filament for the light bulb, he said, “I have not failed. I’ve just found 10,000 ways that won’t work.”

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UNITED STATES – CIRCA 1911: Inventor and physicist Thomas Alva Edison (1847 – 1931) looking at a lightbulb (Photo by Nathan Lazarnick/George Eastman House/Getty Images)

Interestingly enough, the people who can embrace failure and take risks invent things; dare to do what others don’t because they are focused on the road to success in front of them. They don’t concern themselves with the failures they have left behind because in their minds it is just a part of the learning process. These failures don’t represent them.  Instead they are further clues on the road to getting to where they want.

Failure does not mean taking blind risks.  Failure is the result of taking a calculated risk.  It is that percentage of risk that results in a potential failure.  You analyze that result, make some changes and reduce your risk.  You do it again until your risk is eliminated and you succeed. The great Canadian Hockey player, Wayne Gretzky once said, “You miss 100% of the shots you never take”. If you take yourself out of the game, you will never have a chance at winning.

In business the word failure has become synonymous with Silicon Valley, mainly because of the startup and risk taking culture it has developed. However, this is looking at failure on a larger scale. It happens on a much smaller scale daily.  It could be screwing up a dinner, getting a crossword puzzle wrong.  Giving the wrong answer to a question at a dinner party (maybe even the same one where the dinner was screwed up). People are bothered by these failures because it seems to be a reminder that they are somehow not perfect.

Perfection is a figment of the imagination (see our post).  Believing that perfection exists means believing that once achieved you cease to grow or learn.  Our lives are a journey of constant discovery and improvement. To set yourself the illusive goal of perfection, you set yourself up for a string of never ending disappointments.

There have been many strong statements regarding failure made by well-known personalities over the years. They should be used as a great source of motivation towards changing our own perceptions on failure.

“The only real mistake is the one from which we learn nothing.” – Henry Ford

“Success is stumbling from failure to failure with no loss of enthusiasm.” – Winston Churchill

“Every adversity, every failure, every heartache carries with it the seed of an equal or greater benefit.” – Napoleon Hill

“You build on failure. You use it as a stepping-stone. Close the door on the past. You don’t try to forget the mistakes, but you don’t dwell on it. You don’t let it have any of your energy, or any of your time, or any of your space.” – Johnny Cash

“Failure is so important. We speak about success all the time. It is the ability to resist failure or use failure that often leads to greater success. I’ve met people who don’t want to try for fear of failing.” – J. K.  Rowling

“It’s fine to celebrate success but it is more important to heed the lessons of failure.”-Bill Gates

“Mistakes are the portals of discovery.”-James Joyce

The Hutch ReportSo what does all this have to do with Google? Google has to be considered an incredible success on so many levels however they have not achieved it by accident.  Google is one of the few companies that actually see making mistakes as a portal to learning and discovery. They have gone so far as to create a process, which they call a “Postmortem.” A postmortem is the process their team undertakes to reflect on what they learned from their most significant undesirable events. Incidents may happen, but not all require a postmortem. Therefore, the first important step is to 1. Identify the most important problems.

Once they have identified the problem their next step is 2. Work together to create a written record for what happened, why, its impact, how the issue was mitigated or resolved, and what to do to prevent the incident from recurring. They ask themselves questions such as; what went well, what didn’t go well, where did we get lucky, and what can we do differently next time?

Lastly, Google has understood that being blamed for an incident will only promote self-pity and become very unproductive. So they made a conscious decision to apply step 3. Promote growth, not blame. By removing blame from a postmortem, team members feel a greater psychological sense of safety. This enables them to escalate issues without fear. By assuring team members that they will not be punished for the mistakes they made, a greater trust is built. These three steps reposition failure as an opportunity for growth and development rather than as a setback.

These are steps that anybody can apply to their own daily lives. Learn from Google’s mistakes and look at every failure as a chance to discover something new, learn something, or improve something and you will in turn make yourself much happier.