Standard economic theory requires that consumers and businesspeople pay close attention to a vast array of prices, quantities and other information. Because keeping track of this flood of information is very costly, it makes sense to think that people economize on what they pay attention to. That kind of economizing is called bounded rationality, a term coined by polymathic social scientist Herbert Simon, himself a recipient of the Nobel.
Statistics are useful to the extent that we find their insights more persuasive than stories.
But we often don’t.
Data takes effort to contextualize. Stories offer instant gratification. With social media proliferation, everyone is a story teller and has access to publication at no cost.
Capitalism’s success rests on a belief that, given the right incentives, people can work together to solve problems. It’s the greatest story ever told. To understand this better, we need to understand human behaviour. Our brain stores information in bits & pieces as it tends to economise usage of energy. Given that our roughly 2.5 kg brain uses 25% of our overall energy consumption, it become all the more imperative to economise memories or analysis. Stories akin to experience, are a very useful way to believe..
- Stories are often wildly disconnected from our productive capacity.
- We confidently convince ourselves of absurd stories.
As morgan housel says," The growth of anything -- an economy, a company, a market, a career -- has two parts:
- A technical ability that can solve problems and add value.
- People’s propensity to believe in that value.
It is intuitive to believe that most of what drives success is the first point. Real skills add real value. But the second point, the stories we tell ourselves about those skills and values -- can play the deciding role. Stories can infuence the production of real skills themselves, effectively becoming the pilot of our economy "
Think about stock valuations in 2017 for a minute... What is driving this boom?
Not actual problems being solved. No new laws to date actually solve people’s problems but mostly disturb the cosy status quo.
The boom is being driven by a booming belief in the boom.Stories of reforms being fundamental in nature (GST, RERA, Bankruptcy code), drove the optimism about future and thus increased our ability to take immediate pain.
The higher bitcoin’s price goes, the less people think it’s a bubble. A four-fold price increase caused a 12 percentage point drop in those who believed it was a bubble, and a doubling of those who found it undervalued..
These stories can be healthy. Like the optimism bias, we wouldn’t get out of the couch if we believed otherwise. But we should acknowledge that they are stories, susceptible to change and often disconnected from reality.
We must encourage application of the techniques of “scientific” study of the past to analysis of complex ongoing situations and estimates of likely future events. Just as rigorous analysis could cut through the gaps and ambiguities of information on events long past. Analysts shd be self-conscious about their reasoning processes..shd think about how they make judgments and reach conclusions, not just about the judgments and conclusions themselves.
