The thing about “Gedankenexperimente” (thought experiments) is that you never know where they might lead.
In the heady days of breakthroughs, Einstein discovered the general theory of relativity using this mechanism. In the field of social sciences, Richard Thaler spawned a new field of behavioural economics and concluded that humans often were irrational in their decision-making. This destroyed mountains of theory in the process (that codified theory by linearity of thought). Yet the cult of the expert persists, never more so than in economic analysis.
First popularised by Frederick Taylor, the cult of the expert was born when the belief arose that social sciences could be reduced to linear physical science theory. Humans and behaviour could be reduced to scientific principles, and If these were followed, there would be no stopping the path to sunlit uplands and economic exceptionalism.
This was heady stuff, and the public went into a collective swoon, creating the age of the “expert analyst”.
This regimented thinking preserves to this day, where analysts are held up as oracles of Delphi, mysteriously peering into the crystal ball, for forecasts and prescriptions, that despite being proven wrong repeatedly continue to excite the zeitgeist of the media.
This despite the fact that market participants may have since marginalised such opinions. In Dubai, this has been even more acutely felt as experts weighed in on the real estate market.
In classical groupthink, none of them foresaw the coming slowdown, and when confronted with the subsequent upswing, have as of yet been unable to explain away the surprising uptick, resorting either to dismiss it as false starts or by over theorising in a classically outdated linear framework.
While there are many reasons for this, the high order bit remains an inadequate understanding of risk. This then leads to “narrow framing” of the horizon.
When we engage in narrow framing, the focus is always on short term losses; this in turn means returns are lowered because of taking on too little risk.
History demonstrates that the risk of acquiring or holding on to an asset is lowered when its prices fall. Instead, analysts reframe the debate by actually encouraging investors to stay on the sidelines after prices have already fallen.
In this bizarre rationality, the experts often end up as cheerleaders when prices are rising, and sellers when prices are falling, compounding the lowered returns that accrue from such portfolios.
This mode of thinking carries with it its own set of sophisticated vernacular, aiming to dazzle institutional and individual investors alike. While such experts come and go with every economic cycle, the groupthink remains the same, and it brings into focus the most obvious maxim of all.
The expert is out of touch because the appetite for risk is never commensurate with what is needed to accomplish long term investment goals. Under the guise of conservatism — when all evidence suggests that the prudent decision is to invest when prices move lower — experts justify they lower returns.
Around inflection points (both in an upturn and downturn), they are caught out most of the time, and it is only well after a recovery or a recession is underway do the prognostications change.
It is only linear thinking that has been unable to explain the resilience and the subsequent upturn in asset prices in Dubai. Despite macroeconomic headwinds and geopolitical factors, assets have started to outperform, confounding the groupthink.
New jargon with every economic cycle tries to explain the inadequacies of their models, yet the groupthink construct remains the same.
Two decades ago, American critic Christopher Lasch went after contemporary experts: “Elites who define the issue have lost touch with the people. There has always been a privileged class, but it has never been so dangerously isolated from its surroundings.”
These criticisms have never been as applicable as they are today for the expert analyst, especially in the age of big data, where on a real-time basis, commentary can be eviscerated if the facts do not line up.
To survive these, these experts will have to understand that spinning off-the-shelf explanations in a vague attempt to preserve a linearity of thought will no longer be considered acceptable.
Similar to physics, these experts will have to indulge publicly in Gedankenexperimente to demonstrate their skills to earn the public trust … and preserve it by deserving it.
Unfortunately, history suggests otherwise. At some tacit unarticulated level, the question has already been formed in the educated mind: If all the isms have become “wasms”, then what use of the expert?
The writer is Managing Director of Global Capital Partners.
