Lots of Things Happening At Once
“Steve [Jobs] and I will always get more credit than we deserve, because otherwise the story gets too complicated,” Bill Gates once said.
It’s a simple sentence, but there’s a lot of important stuff packed in there:
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Stories are more powerful than statistics because they’re memorable and easy to contextualize.
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Good stories usually have just one hero or one villain because if there are more the plot is hard to follow.
But think of how complex the world is. Then think about how strong our desire is to explain how the world works with simple, single-cause stories.
It’s a problem.
“This happened because of that.”
“This causes that.”
“To get more of this, we need more of that.”
It’s not that these things are always wrong. It’s that, when used to describe something as complex as a business or an economy, they’re usually like the Bill Gates and Steve Jobs explanations: true but incomplete, yet persuasive because they make a good story. And something that’s true but incomplete might be more dangerous than something that’s wrong, because a little truth is fuel for a lot of overconfidence.
In his documentary on American history, Oliver Stone says, “Real history is the story of lots of things happening at the same time.” Big trends rarely have one cause.
Let me give you two recent examples.
Story: College tuition has surged because of a proliferation of government-backed student loans that let schools easily jack up prices.
Of course that’s true.
Many other things are also true:
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The share of tuition paid by students at state colleges has surged as state governments reduce the portion they cover in an attempt to deal with their budget shortfalls.
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Published tuition isn’t a good measure of what people actually pay due to a surge in financial aid designed to make students feel like they’re getting a deal.
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Demand for college has increased as the economy shifts from labor-intensive to knowledge jobs.
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As where you went to college becomes a growing part of a generation’s social identity, students have become less price-sensitive because they think they’re buying more than an education.
Lots of things happening at once.
Story: Interest rates are low because central banks are keeping them low.
Of course that’s true.
What’s also true:
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Horrendous global demographics are a headwind to growth and inflation, which would keep rates low on their own.
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Two of the worst recessions of modern times (2008, 2020) happening within about a decade of each other pushes investors toward perceived safety.
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There hasn’t been serious inflation in the developed world for 30 years. So even seasoned veteran investors have to strain to imagine what inflation would feel like in theory, rather than drawing on painful experience.
There are lots of things happening at once.
And you can, I believe, do this for almost any business or investing topic.
Even a flagrantly obvious statement like, “The economy is weak because of Covid-19” has all kinds of nuance, from government stimulus offsets to the politicization of lockdowns and reopenings. When America’s unemployment rate was 14.7% in April, Germany’s was 5.5% and Japan’s was 2.9%. Lots of different things were happening at once.
“It’s complicated” isn’t a good story. You won’t persuade many people with it, including yourself.
But a few things happen when you attribute trends to single-issue stories.
Your ability to predict how long a trend can and will last is a mess, wrecked by overconfidence in a clean narrative without appreciating how many little, subtle factors can influence a trend – especially in aggregate. An investor or CEO overestimating their odds of future success based on past success is a big one. “I, and I alone, am responsible for this success” is a captivating story that’s often smashed to pieces during its second take.
You’re pushed to the extreme ends of worship and cynicism, led to believe that the good and bad things in life are caused by a few people who look like they have superhuman skills or cruel intentions. The majority of the time it’s more complicated than that – great and terrible things usually occur because several unrelated forces collide at once.
Your ability to change your mind is limited, because simple stories are so persuasive. And part of the benefit of simple stories is that they’re easy to share with others. But once you share a persuasive story about how things work it’s hard to backtrack or update your view, since changing your mind is hard to distinguish from not knowing what you were talking about – especially when your original story was so clear and compelling. This helps explain the stubbornness and inaccuracies of many pundits.
There’s a theory in medicine called diagnostic parsimony. It says doctors should make as few assumptions as possible when diagnosing, settling on the simplest explanation as the most likely.
Doctor John Hickamn once pointed out its limitations. “Patients can have as many diseases as they damn well please,” he said.
A patient is statistically more likely to have a few common ailments than a single big one. Lots of things tend to happen at once, so the push to find one underlying cause to a patient’s ills can lead to false precision at best, misdiagnosis at worst.
It became known as Hickamn’s Dictum, and it’s a useful rule of thumb in many areas of life.
Betting on Things That Never Change