Being Right Too Soon

Charles Peters … had a slogan … “If you’re not afraid of being right too soon.”  But of course, everyone is afraid of being right too soon. It’s bad politics, being out of step with the herd; it looks like you’re greedy if you profit from being wise while others suffer from their stupidity. People want to be “right” at the same time everyone else is — with the result that they delay action until the crunch hits with devastating force. Take the case of Goldman Sachs, this week’s favorite whipping boy. “Goldman Sachs sought to protect itself from a collapsing housing market by selling mortgage investments that it knew were likely to fail,” read the lead of a Post story posted on the Web Monday. Scandalous! Why didn’t they wait and get cratered like the folks at Lehman Brothers, R.I.P.?

The herd gallops toward the precipice for a simple reason: It’s lonely and unpopular to go the other way. Take the question of tax policies that could avert the next big U.S. financial disaster, which is our ballooning federal deficit. The sensible real-world answer, many economists argue, is a value-added tax that would encourage saving at the same time it pays down the deficit to manageable levels. But politicians are terrified of being right too soon on this one.

David Ignatius is right; this applies in politics, news, and even academia. Being into a topic or a position well before others gets you much less than being into it just as others are getting in. Arnold Kling echos:

Here are some of the phrases that are used to describe the Outsiders, the money managers who were right about the subprime bubble: “rude”  blunt” “bothers people” “socially cut off” “isolated” “not hearing the signals”.

More emphasis on institutions like prediction markets would create more incentives to be right before others.  But, alas, I suspect this is a big reason why folks are reluctant to create them; they don’t want people to be rewarded for being right before they were.  They don’t like Goldman Sachs being rewarded for being right first.

In general, we don’t mind rewarding the fashion-savvy; those who pick up a fashion just as it is getting popular signal that they are well connected with fashion leaders.  But be too far ahead and you just look random, weird, and lucky; not well connected.  We also don’t mind rewarding “leaders” who know when our crowd is going where, and who “lead” by jumping out and marching in front of us; forager leaders did that all the time.  But we distrust folks who are rewarded for opposing our crowd; they are not leaders but are outsiders and enemies, and must be crushed.

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  • Mike Prentice

    As I understand it, the government’s case is predicated on Goldman Sachs engaging in fraud. That is what they have to prove, and they think they have the evidence to prove it.

    As to the public perception of Goldman Sachs and why they are the public’s favorite whipping boy, that has more to do with a general anti-Wall Street sentiment. That, on top of charges of fraud, is enough to push GS over the top on the public’s hit list.

    I think that if GS had not been charged with fraud and had not (indirectly, depending on your definition of direct) benefited from the TARP bailouts, they might not be the popular villain of the moment.

    In short, I think your analysis lacks nuance and you picked a very poor exemplar for your thesis.

    • ad

      That is what they have to prove, and they think they have the evidence to prove it.

      Well, all they really have to do is make it look to the public like they are Going After The Guilty Men.

      It’s not as if an unsuccessful case would cost any money to them personally.

    • michael

      Goldman hasn’t been charged with anything. It is a civil suit.

      • Mike Prentice

        I think you are incorrect.

        “SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages”
        http://www.sec.gov/news/press/2010/2010-59.htm

        The SEC’s press release uses the word charge. If you still don’t like it, however, feel free to replace with the phrase “filed suit against” or similar.

  • http://www.brazzy.de/ brazzy

    AFAIK the case against Goldman Sachs is that they made money by selling mortgage packages they knew were likely to fail, while claiming towards customers that these were high-quality investments *and* profiting from CDS deals betting on the failure of the packages.

    Basically, they were commiting a massive indirect fraud against the customers who bought those mortgage packages.

    • Mike Prentice

      One nitpick: That’s direct fraud.

      • http://www.brazzy.de/ brazzy

        I’m not completely sure what those CDS deals looked like exactly. If GS profited only from selling those likely-to-be-cashed-in bets against their own mortgage packages, rather than cashing in on them themselves, it would be indirect.

  • Bryce

    I agree with the statement that deviation from the general consensus is likely to be met with opposition, ridicule, etc. But it seems to me that more often than not the early adopters are worshiped for their legendary insight after their bets pay off (e.g. Galileo).

    It seems incomplete to paint Goldman Sachs’ current situation as only the result of its bets having paid off. Compare public opinion of Goldman to that of John Paulson, whose bets, timing, and “deviation from the herd” are comparable:

    http://www.examiner.com/x-14436-Stock-Market-Examiner~y2009m8d29-John-Paulson-the-other-great-billionaire-investor

    It seems to me that there are other factors playing into Goldman Sachs’ current situation. I unfortunately don’t have a grounded hypothesis as to what those factors may be, but I’d love to hear others thoughts.

    • adam

      Paulson & Co doesn’t have former associates who serve in almost every meaningful regulatory arm in the US.

  • http://fashion-incubator.com Kathleen

    In general, we don’t mind rewarding the fashion-savvy; those who pick up a fashion just as it is getting popular signal that they are well connected with fashion leaders. But be too far ahead and you just look random, weird, and lucky; not well connected.

    I agree with the central focus except the quote above. Fashion is a business. Like any business, predictability and rationality between partners is valued above all else. Increasingly, retailers demand it; to the extent that trend bureaus dictating upcoming colors and silhouettes is the norm (much to my dismay). In fashion as in all else, it is not profitable to be too far ahead. Those crazy whacked out haute couture designs clogging the runways are decried within the industry as much as they are outside of it. I think of those shows as a spectacle, no different than the concept cars released for show by automotive manufacturers.

  • http://numberblog.wordpress.com Sarah

    Business is not my line, but I think public bets among academics (or wonks) would be another way to reward the prescient. Possibly also with prizes, as a commitment for the rest of us to remember the prediction when it comes due.

    Part of the problem is simply keeping track of what people said twenty years ago when nobody was listening. It takes some lucky or diligent observer to notice that twenty years ago some outsider was right, because by definition he was getting less attention if he was an outsider. So correct but surprising predictions, by their very nature, go underreported. We need some kind of credible commitment now to check, in the future, who turned out to be right. Markets, of course, are one kind of commitment, but we probably need alternatives for people whose work is driven more by prestige than money, which is why I’d suggest prizes for predictions.

  • http://akinokure.blogspot.com agnostic

    “they made money by selling mortgage packages they knew were likely to fail, while claiming towards customers that these were high-quality investments *and* profiting from CDS deals betting on the failure of the packages”

    That’s like a soy company advertising its junk as a health food, knowing full well how lacking in nutrients it is and full of toxins it is unless fermented, and then investing in health care stock for when soy consumers predictably get worse health. The reason soy is so profitable is that there’s a herd screaming for the stuff — they do believe it’s healthy, but not because some faceless corporation said so. It’s an article of faith built from the ground up among particularly clueless eaters. A fertilizer company could not brainwash a herd into thinking its junk was health food.

    The soy company diving into health care stocks would be a signal that current lifestyle trends are unhealthy.

    “Fashion is a business.”

    Baby names are subject to fashion, but there is no business. No trend bureaus who dictate upcoming trends in initial consonants, metric length, etc. As with fashion in material items, no one wants to be right too soon — you’d look like a weirdo naming your kid Jenna or Aiden in the 1970s, but when you do so in the 1990s and 2000s you’re part of the crowd and feel great.

    • lemmy caution

      Baby names are funny. A very common scenario is for someone to name their kid what they think is a pretty unique name just to find out later boatloads of other parents are using the same name for their kids. It happened to me, my brother and it just happened to someone here at work.

      This book on baby name trends is excellent and very readable:

      http://www.amazon.com/Matter-Taste-Fashions-Culture-Change/dp/0300083858

  • Philo

    But being a “contrarian” is a recognized, respectable stance in personal investing–a context in which it is very nearly viewed as proper simply to try to maximize one’s own return. In some other social setting, where one is expected to act for the collective good, there are incompatible social demands: stick with the herd (be a team player, don’t rock the boat), *but also* share your special information, insight, etc., so as to save the collective from the disastrous course it would otherwise have pursued. (In part, I’m echoing Bryce, above.)

    Incidentally, “being right too soon” is an ambiguous phrase, not really suitable for your post. In investing it is usually taken to involve actually being, for a time, *wrong*. For example, it might lead one to short a stock that then continued to go up in price for a time–during which one’s opinion was wrong–before finally going down. (One’s opinion about the market value of the stock would have been, for a time, wrong; his opinion about its “intrinsic” value may have been right throughout.)

    • lemmy caution

      Incidentally, “being right too soon” is an ambiguous phrase, not really suitable for your post. In investing it is usually taken to involve actually being, for a time, *wrong*. For example, it might lead one to short a stock that then continued to go up in price for a time–during which one’s opinion was wrong–before finally going down. (One’s opinion about the market value of the stock would have been, for a time, wrong; his opinion about its “intrinsic” value may have been right throughout.)

      I was in this boat. I “knew” there was a housing bubble in 2000 so I did not buy a house. People who doubt a bubble to early get burned. This just adds fuel to the bubble.

  • Jess Riedel

    The sensible real-world answer, many economists argue, is a value-added tax that would encourage saving at the same time it pays down the deficit to manageable levels. But politicians are terrified of being right too soon on this one.

    I thought the convention wisdom on a value added tax is that it would need to replace the income tax (otherwise, having both taxes would surely lead to even greater expansion of the federal government) but the income tax is far too entrenched because so many companies, organizations, and voter-blocks have special exemptions/benefits that they would fight to the death to protect.

    Surely, the is an incredibly weak argument for this “right too soon” phenomenon.

  • Mitchell Silverman

    “The only reward for being ahead of your time is the ridicule of your peer group”.

    We love the stories where the lone thinker is ahead of his/her time. But only after they have been shown to be right. And often only after they are dead and cannot compel us to question other assumptions and view points.

  • unthinker

    You dudes and dudettes need to read up on complex adaptive systems, chaos theory, probability theory, human nature, sociology, psychology, political science, philosophy, random chance, self-fulfilling prophecies, a million monkeys typing, black swans, human cognitive biases etc.

    Oh, wait a minute, you probably have.

    So can you please use your deep knowledge to provide some real insight beyond “we ignore some people because of the confirmation and ingroup biases and then a subset of those people sometimes end up being right anyway but we can’t predict which subset will be right ahead of time so we might as well just continure using our traditional hueristics and biases”? 🙂

  • Bill

    Robin,

    I put your retirement account in Goldman CDOs.

    Sorry.

    They told me it was a good deal.

  • http://lightskyland.com Matthew C.

    The other reason the public is furious with Goldman is that the “AIG Bailout” was in actuality a bailout of GS since the money going into AIG was going right back out to pay off GS billions of dollars.

  • Eric Falkenstein

    I do agree that being right too early is poorly appreciated. Think Stan Liebowitz pointing out the flawed analysis that gave impetus to lowering mortgage underwriting standards way back in the mid 1990s. he’s hardly mentioned.

    On the other hand, a problem with seeing things early is that it could suggest one was merely a broken clock that eventually hit the right time. Think Nouriel Roubini, who has been predicting disaster for over a decade (for just about every reason possible too–so one of them is always right). Also, Hyman Minsky got a big rehabilitation, but he too was always predicting a financial crisis, and so the fact that one happened 15 years after his death is hardly a confirmation.

  • Jerry Mitchell

    The biggest argument against the VAT that I know of is that it pretty effectively hides the real cost of government from the populace in the form of higher prices.

    If it were up to me, there would be one tax allowed for all local, state, and federal taxes, payable every payday to the city hall in cash. That would let everyone know, in no uncertain terms, the real cost of government. I would expect a tax revolt the day it went live.

    • Guy

      No one likes paying taxes, but they like public services. There`s a contradiction there that ordinary people never have to resolve (and when government tries to avoid confronting it the result is deficits).

      I suspect the problem with introducing a VAT is both as was mentioned that the current tax regime has constituencies who benefit from it and will therefore resist change and probably more importantly simply that taxes are always unpopular, and no politician likes talking about doing unpopular stuff.

  • Jan Rogozinski

    In general, you are correct. I have suffered for many years because I invariably see what is coming long before unlearned academics and the vulgar mob.

    My Casandra curse has of course gotten much worse, since the 1960s when any notion of truth has been silenced by political correctness.
    (I especially love blips and editing one’s sources. There is, obviously, nothing in the least wrong with accurately quoting a source that contains the word shitty (as Carl Levin did) or the word nigger. The euphemism, “the ‘N word’ is just, well, stupid and vulgar.)

    But your example is says precisely the opposite of what you think it says. The problem is NOT that Goldman told folk the crash was coming and thus were punished for being early. The problem is that Goldman did NOT tell anyone the crash was coming, while they were selling what they were certain was worthless crap.

    The idiots from Goldman at the committee hearing kept saying “We just make markets.” If that is so, then “making markets” should be outlawed and punishable by death.
    .
    In effect, they were saying, “We make markets in any thing. If someone came to us and said, sell this delicious tasting stuff that kills those that drink it a year after they drink it, we would send out salesmen to sell the stuff AND NOT TELL ANYONE ABOUT THE CONSEQUENCE.S”

  • Gloria

    I disagree with Agnostic’s soy analogy. Soybeans themselves are pretty healthy. Processed soy is probably healthier than the product it replaces full of e coli and such, and soy isn’t what’s causing heart disease, cancer, stroke, type 2 diabetes, etc. A better analogy would be meat. I once had a doctor tell me that overall “hospitals are places for meat eaters.”

  • http://entitledtoanopinion.wordpress.com TGGP

    Sarah, it sounds like you are talking about the idea behind Hanson’s “Can Gambling Save Science?”

    Matthew C, I also once believed that but apparently Goldman Sachs had no direct exposure to an AIG default.

    Mitchell, you are wrong about “hidden” taxes.

  • Noumenon

    In craps, everyone hates the guy who bets “don’t pass.” Whether or not he wins. So you have to separate that effect and say “do people who won because they were different AND SMARTER get more or less hatred than people who just won by being different?”