Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“Math isn’t my thing, Anonymous. The math supports what I say 100 percent.”
Those 2 sentences are in conflict with each other. You admitted you lack credibility.
I don’t see any conflict. It’s true that math isn’t my thing. And it’s true that the math supports what I say 100 percent.
Your point seems to be that you cannot place confidence in what I say re the math because I am not personally good at math. But Shiller is good at math. And Wade Pfau is good at math. And Rob Arnott is good at math. And John Walter Russell is good at math. So the point remains.
My personal belief is that people should look at things other than the math. There are LOTS of things that support VII and math is just one of them. I am personally more impressed by some of the other stuff because math is just not my thing. But it gives me a good feeling to know that the math supports VII too. I’d much rather have the math on my side than not have the math on my side.
The puzzle is how there could be anyone who does not support VII given what the math says. That’s where cognitive dissonance enters the picture. And that’s where I get super interested. The cognitive dissonance thing is fascinating to me. What should investment advisors do when one strategy is far superior in terms of risk and return but the other strategy is better from a marketing perspective because it taps into the Get Rich Quick urge within us all while the other strategy is rooted in logic and math and other stuff that does not turn people on so much?
The story here is a story of marketing vs. research. It’s a story where the marketing edge held by one of the strategies is so strong that people cannot even appreciate what the research says. People are not persuaded by the research not because there is anything non-persuasive about the research but because people will not let the research findings into their minds because they find them too darn painful to accept.
That’s not math, that’s psychology. The psychology effect here cancels out the math effect, even among people who in other circumstances place great value on what the math says (Buy-and-Holders in ordinary circumstances LOVE math). So getting the math right is not enough. To offer helpful investing advice, you’ve got to get the psychology right. And that’s not something that most people in this field worry about too much. People think of investing as a math field, not as a psychology field.
One of the many far-reaching implications of Shiller’s “revolutionary” (his word) findings of 1981 is that the investing advice field is a field in which understanding psychology is more important than understanding math. So that’s the direction in which we need to move. In the future, we will never talk about the math without taking the effort to put it into a psychological context because there is a risk that people will not understand the math if we haven’t first put it in the proper psychological context.
Is Shiller a psychology guy or a math guy? I would say that he’s a psychology guy. His primary contribution is on the psychology side. But he likes to present himself as a math guy. He does that all the time. He uses the same sorts of tables as the Buy-and-Holders use. He likes to take surveys. That way he can talk about people’s beliefs and feelings and have numbers next to them in the places where he presents them. He uses charts and graphics, which are not that common in the psychology field, to make his points. He is almost always making a psychology-related point. But he makes an effort to make the point through the use of numbers rather than just narrative. Because that’s what people in this field do. It makes him fit in better for him to do that.
I don’t fault him for it. I think that it’s great that he does that. He takes psychological concepts that possess great power and importance and expresses them with numbers so that he is using the language that people in this field understand and appreciate and accept. So good for him.
There are limits with how far you can go with that, though. My contribution is often to take the psychological-concepts-presented-in-math-form that Shiller and others are putting forward and to translate them into the sort of narrative that you would expect to hear if they were being presented in a field other than the investing advice field.
The best example of this was when Bill Bernstein made the case that the Buy-and-Hold retirement studies get the numbers wildly wrong because they don’t include valuation adjustments. Those are my words, not his. What Bernstein did (in his book The Four Pillars of Investing) was to say that, to adjust for the valuation level that applied near the top of the bubble, you need to subtract two points from the withdrawal rate identified by the Buy-and-Holders as safe — 4 percent. Bernstein didn’t perform the math exercise. He didn’t say “subtract 2 point and you get a safe withdrawal rate of 2 instead of 4.” He just gave people the math-based information they needed to figure out the correct number for themselves. He understood that he would upset people if he said plainly that “the safe withdrawal rate is today 2” because that enters the psychology zone. Tell people that and you are going to cause them to experience intense anxiety.
I go the extra step. I say “the safe withdrawal rate is today 2 percent” That statement is the product of a math exercise but it has psychological import as well. That statement scares people who planned their retirements based on a belief that the safe withdrawal rate is 4. So it is not just math anymore when you say it that way. And I of course take it even a step further. I don’t just say “the safe withdrawal rate is today 2 percent.” I say “that means that we are likely going to see millions of failed retirements in days to come because we have been telling people for years now that the safe withdrawal rate is 4 percent and they believed us.” That’s an INTENSE psychology statement. That statement leaves the math behind and travels to places that Bill Bernstein does not dare go.
I am famous for making statements like that and then refusing to take them back or to shut up about them or whatever. I am a pain inflictor. Not because I don’t like my Buy-and-Hold friends. Because I think that what the math is telling us is important and has psychological implications that need to be explored.
I added the second part to this comment Thursday morning after re-reading what I had written Wednesday night. I read the initial response and I realized that I wanted to say a bit more about how I take math concepts advanced by people like Shiller and Bernstein and push them into the psychological realm.
The psychological realm is where I think the real action is. The math is important. I don’t at all mean to denigrate the good people who focus on the math. But I believe strongly that the psychological stuff is what drives the investor decision-making process in the investing realm and so we must be willing to explore psychological stuff in great depth to do truly effective work in this realm. So I make it a practice to push the math stuff to the next stage, to the psychological stage.
That’s why you Goons hate me. You don’t want to know what the math says. You want to live in a world of illusion. You tolerate the Bernsteins of the world and to a point even the Shillers of the world. They are willing to present their math-based stuff and then shut their mouths about the obvious psychological implications of what the math tells us. That’s bearable to you. You don’t like it. You would be happy if they would knock it off and be Bogle-pure. But you get it that sometimes a guy feels a need just to report the math accurately no matter what crazy thing it says. So you tolerate Bernstein (and Shiller, to a lesser extent).
But I cross the line. I say “so we need to correct those bogus retirement studies before they ruin more middle-class lives!” That’s a bannable offence. That is the sort of thing that simply must not be said. That comes pretty darn close to accusing the Buy-and-Holders of financial fraud. That sort of statement requires ACTION. You don’t want to act. You want to live in the comfortable, complacent world of 1980, in the days before Shiller did that darn math exercise that caused him to be awarded a Nobel prize in Economics. I blotted that happy world out with my math-translated-into-psychology statement. So I must be blotted out!
The reason why I did only saving work and never investing work in my early years is that I saw that investing was a numbers-oriented field. Numbers are not my thing, psychology is my thing. So I stuck to saving, where it is accepted that psychology (motivational stuff) plays a big role and left investing to the “experts.” Then Greaney’s Goon Squad launched their smear campaign against Wanderer, who was a guy who wrote effectively about saving from a emotion-based perspective. That’s when the numbers-based stuff at the old Retire Early board bled into the psychology-based stuff. Greaney violated the unspoken agreement where people from both sides stayed on their own turf and left people who wanted to play on the other side alone. He wasn’t going to permit the psychology-oriented side of the board community to continue to exist because something that Wanderer said about real estate threatened him too much.
I used the same psychology-oriented arguments that I had had such success with on the saving side in the discussions of investing that followed. But they didn’t bring about the same result! People are not used to hearing psychology arguments in investing discussions. Where are the numbers, man? Investing has long been a numbers-based discipline. People expect to see numbers, not narratives. And certainly not song lyrics!
Shiller is a transitional figure. He makes psychology-based points using numbers. He makes an effort to speak the language of the Buy-and-Holders. I make an effort too. But I am less willing to compromise my psychology-based points to make them palatable to people expecting to see investing-oriented points presented through the tools that are most commonly employed in a numbers-focused field.
I think we give up too much when we limit ourselves in that way. I think that there are many important things that Shiller either understands or is close to understanding about how stock investing works that he has never told us because he is held back by his fear of leaving the numbers behind at times and framing his psychology-based points in the way they would be framed in any field without such a long history of sticking to the numbers.
I started out that way. I started out being as fearful as Shiller is of crossing the line, probably more so. Before May 13, 2002, I didn’t speak up AT ALL. But over time, I learned that holding back just doesn’t work. If you are going to say that the Buy-and-Hold retirement studies are in error and need to be corrected (I needed to say this much because of the circumstances that applied in a board community in which John Greaney was present), then you were persona non grata no matter how soft you played it and you might as well just let it rip. I still make a big effort to be polite because I have a general belief that that’s the way to go. But I state my investing points more boldly than Shiller dares to present his or than anyone else in this field dares to present his.
Math is great. I APPROVE of math. But math can only take you so far. At some point you have to DO SOMETHING with the math. If the Buy-and-Hold retirement studies are in error, then you need to get off your bottom and produce ACCURATE retirement studies, retirement studies that include valuation adjustments because the aim is to get the numbers right. Those sorts of studies are going to upset Buy-and-Holders not matter how gentle you are in your presentation. Your words that “you guys got the numbers wrong!” are fighting words to the Buy-and-Holders no matter how nicey nice you are in the comments that surround those words.
So you might as well just let it rip. If the Buy-and-Holders are going to threaten to kill your wife and children in any event, you might as well just go ahead and tell the full story to the best of your ability for that 10 percent that is losing confidence in Buy-and-Hold and that is open to hearing about a new truly research-based strategy.
You got me going a bit with that one, my long-time Buy-and-Hold friend. Now I am pumped for the new day!