Nov 2, 2008
Contrarianism and Charlie Munger
Today’s New York Times features an awesome article: “Challenging the Crowd in Whispers, Not Shouts” by Robert J. Shiller.
Shiller discusses why the housing bubble was ignored by colleagues. At heart here is the issue of when to be a contrarian. This is a subject I’ve posted about a lot since the start of the blog. As value investors we almost always have to act as contrarians by nature.
The thing I liked about the article is that it discusses a reason for not being a contrarian that I hadn’t have thought of:
The field of social psychology provides a possible answer. In his classic 1972 book, “Groupthink,” Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group…
In addition, it seems that concerns about professional stature may blind us to the possibility that we are witnessing a market bubble. We all want to associate ourselves with dignified people and dignified ideas. Speculative bubbles, and those who study them, have been deemed undignified.
I’ve never thought of contrarianism in these terms — where being a contrarian can affect how your colleagues perceive you and whether or not your professional opportunities are limited by bucking the trend.
When I think of contrarianism, it’s really from a more individualistic perspective. Many investment fund managers are able to achieve a good sense of individuality, managers in the value sector are actually afforded the luxury of being contrarian – it’s part of the job. In other professions, that isn’t the case.
Shiller describes economists working for the federal reserve, but I can think of other places affected by the same problem. A number of people working in the mortgage industry raised questions about the sub-prime loans being made, but were basically told to get back in line. Similarly, recent testimony from the ratings agencies revealed documents detailing questions that were raised regarding certain CDOs.
With economic research councils, like Shiller cites – perhaps something can be done to promote more diverse areas and contrary opinions. I know that some organizations utilize a technique where when someone proposes a plan another employee is given the task of playing devil’s advocate and arguing why the plan should be rejected.
In the other examples, the mortgage lending industry and ratings agencies the problem was a bit different. It was an agency issue. These folks were generally paid based on quantity of work, not quality. That kind of thinking creates a culture of greed and we know how that ends. Tackling that problem is more difficult. You need to adjust the psychological mindset of the people working there. The easiest way would be to alter how compensation works at those firms – so that they have an economic interest in their work, rather than being able to pass the risk off to the next person down the line.
How do you fix something like this, or prevent this kind of thinking?
You need a diverse group of mental models.
Why do professional economists always seem to find that concerns with bubbles are overblown or unsubstantiated? I have wondered about this for years, and still do not quite have an answer. It must have something to do with the tool kit given to economists (as opposed to psychologists) and perhaps even with the self-selection of those attracted to the technical, mathematical field of economics. Economists aren’t generally trained in psychology, and so want to divert the subject of discussion to things they understand well. They pride themselves on being rational. The notion that people are making huge errors in judgment is not appealing.
Shiller highlights one of the greatest issues with economics, the lack of interdisciplinary thinking. He’s not the first person to bring this up. Warren Buffett’s famous business partner, Charlie Munger has been a huge proponent of interdisciplinary thinking .
From his speech – Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs (PDF)
I think there’s a modern name for this approach that Whitehead didn’t like, and that name is bonkers. This is a perfectly crazy way to behave. Yet economics, like much else in academia, is too insular. The nature of this failure is that it creates what I always call, “man with a hammer syndrome.” And that’s taken from the folk saying: To the man with only a hammer, every problem looks pretty much like a nail. And that works marvelously to gum up all professions, and all departments of academia, and indeed most practical life. The only antidote for being an absolute klutz due to the presence of a man with a hammer syndrome is to have a full kit of tools. You don’t have just a hammer. You’ve got all the tools. And you’ve got to have one more trick. You’ve got to use those tools checklist-style, because you’ll miss a lot if you just hope that the right tool is going to pop up unaided whenever you need it. But if you’ve got a full list of tools, and go through them in your mind, checklist-style, you will find a lot of answers that you won’t
find any other way.
Maybe Shiller will find Munger’s speech. I think he’s enjoy it.
Having these mental models can improve your judgment by getting you to look at problems from non-traditional perspectives. It will get you to question the crowd and might give you the oomph you need to yell instead of whisper amongst your colleagues.