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The Sovereign Debt Crisis and Confirmation Bias

The Misconception: Your opinions are the result of years of rational, objective analysis.

The Truth: Your opinions are the result of years of paying attention to information which confirmed what you believed while ignoring information which challenged your preconceived notions.

-Confirmation Bias, You Are Not So Smart

The last time I mentioned this topic was when I was explaining that researchers have postulated that "reasoning was not designed to pursue the truth. Reasoning was designed by evolution to help us win arguments." So its not about the "facts" per se but rather positioning the facts in a light that advances your own agenda or ideas.

I was thinking about this yesterday in the context of the post Marc Chandler wrote on Greeks working 48% more hours than Germans. Here’s how I put it on Twitter yesterday:

  • Entrenched debt crisis myths are causing pushback on this: Greek workers work 48% more hours than Germans http://bit.ly/xZYLNa $$
  • The pushback on the absolutely true fact that Greeks worker longer hours demonstrates how media misinformation shapes opinion $$
  • People develop a view based on accumulated data points and anything that counters that view is questioned or even rejected #psychology
  • When the media push out slanted or factually incorrect information, people who do not dig deeper are fooled #propaganda
  • MUST READ: When your deepest convictions are challenged by contradictory evidence, your beliefs get stronger. http://bit.ly/AF0hnP$$

That last Tweet is an interesting one. Here’s what the article says:

When you read a negative comment, when someone shits on what you love, when your beliefs are challenged, you pore over the data, picking it apart, searching for weakness. The cognitive dissonance locks up the gears of your mind until you deal with it. In the process you form more neural connections, build new memories and put out effort – once you finally move on, your original convictions are stronger than ever.

-The Backfire Effect, You Are Not So Smart

When it comes to the economy, there are still a lot of people who are not committed to a particular worldview and are, therefore, open to considering different ideas. I usually try to be one of those people. But the major figures in the world of economics and finance have years of experience and knowledge telling them that "when someone shits on what you love, when your beliefs are challenged, you pore over the data, picking it apart, searching for weakness." That’s what has been going on in the blogosphere.

I get tired of these same old arguments — especially when I know they are not going to change anything. People will crawl into their corners and try to figure out how they can win the rhetorical argument, facts be damned. That’s how people operate in real life and that’s how the operate on the Internet too. So you won’t see me getting into ideological pissing matches. It’s hopeless and a waste of time. All I can do is present you what I think is best reflective of a coherent framework on how to judge the macro backdrop in a way that will give you the greatest ability to anticipate what is going to happen next in this difficult investing, business and economic climate. Sometimes I’ll get it wrong but usually I have got it right (so far).

When I was talking about the backfire effect last year I said that "pendulum swings in policy and ideology are a product of people without conviction on issues taking sides. In today’s context, political and ideological battle lines will harden. Eventually, someone will win these policy battles and policy will tilt one way. Afterwards, one side or the other will be proved right by events." But not everyone will believe that events proved anything. The backfire effect will be too strong. That’s just how it is going to have to be.

As for the Greek situation, a lot of people find it hard to believe that ‘lazy’ Greeks work longer hours than ‘hard-working’ Germans, having been so brainwashed by propaganda. What these people prefer to believe is that the Greeks doctored the numbers, just as they did the debt and deficit numbers to get into the euro zone.

But again, it goes to a specific world view: Greeks are cheating, lazy tax dodgers who run up debts that they can’t pay and probably have no intention of paying. The same goes for Italians and Spaniards. Germans on the other hand are industrious, forthright Europeans paying more than their fare share for the free riders while still maintaining their own fiscal probity.

We have shown this picture of Europe to be inaccurate many different times. How many times do we have to revisit this theme? Don’t the numbers speak for themselves? I think you know the answer — they don’t if they don’t agree with one’s pre-conceived ideas.

My view here: what the data say about productivity and industrial policy is a lot more important than the number of hours worked. The Greeks need to increase productivity and that means making drastic changes to their industrial organisation. What those changes are is a topic in and of itself.

Moreover, in Germany, Japan and Switzerland, the currencies have appreciated sharply during the past 40 years. I would argue it is because of this that their industries have been forced to move up the curve in manufacturing toward more value-added manufacturing. The point being that a weak currency allows lower productivity companies that would be forced out of the market or forced to gain productivity to continue in business. So the currency can have a lot to do with this in my view.

The myth that Greeks are lazy and Germans are industrious and that this has some significance in the sovereign debt crisis is everywhere one turns. It is false. The issues for Greece are not about working longer hours but are ones of productivity, industrial organisation, and demographics. That won’t stop people from spinning the tales of lazy Greeks and workaholic Germans. People will believe whatever they want to believe based on their world view and presenting facts that challenge that view is only going to make these people dig in deeper into that view.

My prediction: As the sovereign debt crisis deteriorates, it is these kinds of world view conflicts which will make nationalism a very potent force to deal with.

P.S. – Last night, a friend from college turned me on to the You Are Not So Smart book. I am reading it now. Highly recommended.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

11 Comments

  1. Dave Holden says:

    Your article probably demonstrates my own confirmation bias, because I wasn’t aware how strong the meme regarding national traits was. I’m probably “filtering”. For me, and this is probably my confirmation bias, this whole thing is about cronyism and that has no national boundaries.

    On world views, my reading of the economics blogosphere has opened my eyes to how not smart very smart people can be when they’ve invested so much in a “model”. Both in forgetting it’s “just a model”, and in their not smart advocacy of said “model”. Irrespective of the validity of a position there are “smart” ways to go about advocacy, they don’t always make you feel good but they are usually more effective. Those smart ways of course can be used for good or bad, for a nice read related to this see http://www.skepticalscience.com/docs/Debunking_Handbook.pdf

    • You should read that book I recommended because it is illuminating. I agree with you 100% that people get so invested in their mental models of how the economy works that all of the negatives of human heuristic reductionism come into play when those models are attacked. It’s like someone is attacking you and so you defend tooth and nail. The question is how to build up an adequately rigorous model without getting overly invested in tearing apart attacks on it out of confirmation bias. Ultimately, you have to lock down a consistent, coherent world view and when you do it is inevitable that you defend it with fury when it is diminished.

      Thanks for your thoughts on this.

  2. Anonymous says:

    Like you I’ve given up fighting people’s biases especially as evidence mounts that overconfidence and self-deception have their own built-in reward system, (Overconfidence, Self-deception, and Social Signaling), are a stable phenomena from  an evolutionary game theory perspective, and that any “handicap” resulting from the downside risks are also seen by potential mates as indicative of strength.

    Basically, you are fighting a losing battle on all fronts, which irrepressibly will include your own. The best one can hope to do is to minimise the damage.

    • Happy new year. Yes, the key is to put devices into one’s work flow that force one to confront one’s own self-deception. The first thing I try to do is draw my information from enough different sources to minimise self-deception. At some point I am going to write up a workflow that is designed to counteract these self-deceptions.

      And that’s all we can hope to do.

      • Anonymous says:

        Like you I get my information from a lot of sources to minimise my self deception. Though I thought that the crisis would start a few years earlier just before the dot.com bubble burst. What surprised me was the lengths that the authorities went to, to stabilise the situation. I was concerned by the rise in debt particularly in the UK, but failed to notice the dependence of UK banks on the interbank markets. When the Financial crisis stuck, it became clear where the weak links were, and many were papered over by excess central banks liquidity programs. So while runs were less likely I could not see how the banks could trade their way out of insolvency.

        In your piece I do think that rising nationalism will be a problem. You only have to see the rise of Jobbik in Hungary to see that. You and I agree on many things but I am afraid I am much more pessimistic than you are on this. I do not see this crisis being solved by our politicians. Extend and pretend will continue till it can no longer cope. There will probably be two decades of stagnation as debts are paid down and societies collapse, unless of course these financial collapses are quick with debts being written off. After that I see decades of bank regulation with caps on debt, which might constrain growth it will eliminate tax payer pain. 

      • Anonymous says:

        Like you I get my information from a lot of sources to minimise my self deception. Though I thought that the crisis would start a few years earlier just before the dot.com bubble burst. What surprised me was the lengths that the authorities went to, to stabilise the situation. I was concerned by the rise in debt particularly in the UK, but failed to notice the dependence of UK banks on the interbank markets. When the Financial crisis stuck, it became clear where the weak links were, and many were papered over by excess central banks liquidity programs. So while runs were less likely I could not see how the banks could trade their way out of insolvency.

        In your piece I do think that rising nationalism will be a problem. You only have to see the rise of Jobbik in Hungary to see that. You and I agree on many things but I am afraid I am much more pessimistic than you are on this. I do not see this crisis being solved by our politicians. Extend and pretend will continue till it can no longer cope. There will probably be two decades of stagnation as debts are paid down and societies collapse, unless of course these financial collapses are quick with debts being written off. After that I see decades of bank regulation with caps on debt, which might constrain growth it will eliminate tax payer pain. 

  3. SH says:

    Hi Ed:

    I’m reading “How We Know What Isn’t So” by Thomas Gilovich.  I can’t say that it offers revolutionary information, but it was written in 1991 by a psychologist and what I think it does, is demonstrate people have been on this topic for years.  It just took someone like Kahneman to bring it to finance.

    My big beef is here though is on the “Greeks don’t work” meme.  I am biased because I grew up with the owner of Mykonos on K street (made famous by Stephanopolis) daughter and that guy worked 80 hours a week and is wildly successful.    His family now lives in Potomac.  Most Greek businesses in America are successful for the same work ethic.

    I never thought Greeks did not work, I thought Greeks had very generous public benefits.  I actually think this is a false meme.  Low retirement age does not equal low hours worked.  I think this meme is a fabricated distraction aside from stereotypes.  Here’s my stereotype.  A Greek or Spanish food vendor working 18 hour days and selling good food.  Sorry, I just have never dealt with the professional classes because I’ve only been a tourist.

    So, to conclude, I am not so sure this Greeks don’t work theory is even believed.  I think it is more likely a distraction.

    Thanks again,

    Scott

  4. Scott says:

    Hi Ed:

    I’m reading “How We Know What Isn’t So” by Thomas Gilovich.  I can’t say that it offers revolutionary information, but it was written in 1991 by a psychologist and what I think it does is demonstrate people have been on this topic for years.  It just took someone like Kahneman to bring it to finance.

    My big beef is here though is on the “Greeks don’t work” meme.  I am biased because I grew up with the owner of Mykonos on K street (made famous by Stephanopolis) daughter and that guy worked 80 hours a week and is wildly successful.    His family now lives in Potomac.  Most Greek businesses in America are successful for the same work ethic.

    I never thought Greeks did not work, I just read that Greeks had very generous public benefits.  Low retirement age does not equal low hours worked.  I think the Greeks don’t work meme is fabricated because it distracts from the retirement age and public benefit issue.

    If I had to suggest a stereotype it would be a Greek or Spanish food vendor working 18 hour days and selling good food.  Sorry to be shortsighted, but I have never dealt with the professional classes because I’ve only been a tourist when I’ve been in those countries.

    So, to conclude, I am not so sure this Greeks don’t work theory is even believed by people.  I think it is more likely a distraction.  I am probably totally incorrect though.

    Thanks again,

    Scott

  5. Scott says:

    Hi Ed:

    I’m reading “How We Know What Isn’t So” by Thomas Gilovich.  I can’t say that it offers revolutionary information, but it was written in 1991 by a psychologist and what I think it does is demonstrate people have been on this topic for years.  It just took someone like Kahneman to bring it to finance.

    My big beef is here though is on the “Greeks don’t work” meme.  I am biased because I grew up with the owner of Mykonos on K street (made famous by Stephanopolis) daughter and that guy worked 80 hours a week and is wildly successful.    His family now lives in Potomac.  Most Greek businesses in America are successful for the same work ethic.

    I never thought Greeks did not work, I just read that Greeks had very generous public benefits.  Low retirement age does not equal low hours worked.  I think the Greeks don’t work meme is fabricated because it distracts from the retirement age and public benefit issue.

    If I had to suggest a stereotype it would be a Greek or Spanish food vendor working 18 hour days and selling good food.  Sorry to be shortsighted, but I have never dealt with the professional classes because I’ve only been a tourist when I’ve been in those countries.

    So, to conclude, I am not so sure this Greeks don’t work theory is even believed by people.  I think it is more likely a distraction.  I am probably totally incorrect though.

    Thanks again,

    Scott

    • Anonymous says:

      Likewise for all the Greeks I’ve known, though this has been limited to academia so standard disclaimers with respect to representative samples apply.

  6. Scott says:

    Delete, hit the button too many times