There is no piece of fiction (other than those published by the Chinese National Bureau of Statistics, perhaps) presented more earnestly as fact than the Periodic Physical Exam of the President of the United States. The latest report was released to Americans waiting with bated breath earlier today. Not exactly the stuff of best-sellers, but it’s a nice bit of fantasy all the same:
I’m not a doctor, but I am a gambling man. I would give you very favorable odds if you think there is any chance that the president weighs 243 pounds, has a resting heart rate of 70 bpm, or blood pressure of 118/80. It is a fantasy. Everyone knows it is a fantasy. The point of the Periodic Physical Exam is not to inform you. It’s to make you feel like the executive is in the hands of a healthy, vital individual.
This is obviously not just a feature of this weird report on a routine physical. For example, I’m writing this little brief from an airplane. As with every such trip, before takeoff we heard the safety demonstration telling us all about the features of this Embraer Regional Jet. Here’s where you’ll exit in the case of a water landing, and make sure you grab that flotation device from underneath your seat. Here’s what you need to know in case we fly into a mountain. Here are all the restrictions you need to follow – where to put your bags, when you can have your tray up or down, who can sit in an exit row – to make you safer in each of those situations.
So, er, I’m not an aeronautics engineer either. But if you really believe that you’re going to be grabbing a flotation device in the case of a water landing, or that the positioning of your bag is going to matter in the case of another kind of crash, you are delusional. You’re gonna die. I hope that this does not come as a surprise to you. But airplane safety demonstrations are not about informing you about what you should do in the case of emergency. They’re about making you feel safer flying.
If you are Ben’s age – and my demographic data tells me a goodly portion of you fine people are, in fact, middle-aged males – you probably remember the nuclear bomb drills from the 70s and early 80s. Duck and cover. OK, sure, if you are on the periphery of the blast zone, maybe you’ll have enough time to respond AND maybe you’ll also be outside of the range where massive overpressurization would collapse your internal organs AND maybe you’ll be outside of the range where the fireball would turn you to a fine dust AND maybe you maybe the act of hiding under your desk would protect you from falling debris or retinal damage or some of the most damaging forms of radiation emanating from the blast.
But c’mon. Duck and cover was never really about protecting you from the effects of a nuclear attack. It was about making you feel like you might have some control. You know, like control over whether being heated to a temperature hotter than the surface of the sun would be fatal. It was about excising your sense of despair.
We’ve written a lot about the Bad Things that have come to our industry from an approach to facts which cultivates a limited selection of words and images to convey a particular feeling. That’s not really what we’re dealing with here. These are garden variety lies. What’s more, they are justified by all three of the reasons why we lie: because we must, because we may, and because we believe doing so serves a Greater Truth. Still, it would be kind of weird to argue that these examples aren’t pretty harmless. The problem isn’t that we play these games of pretend together from time to time. The problem arises when we’re the only one playing who doesn’t realize that we’re playing a game of pretend.
In our investing lives, this isn’t an occasional threat. It is our everyday reality. So how do we know when we’re treating a game of pretend like the real thing?
Well, are you receiving your fund managers’ holdings? Do you believe this will give you material insight into their processes and strategies? If so, you are the one who doesn’t realize you’re playing a game of pretend.
Are you feeding somebody’s capital markets expectations into a mean-variance optimizer to generate a set of efficient portfolios to tweak to come up with your new model? If so, you are the one who doesn’t realize you’re playing a game of pretend.
We’ve got a word for this sort of thing on Epsilon Theory. These are both kinds of cartoons, and they are everywhere, whether we’re talking about economic data, diligence lists, disaster recovery plans, risk reports – you name it. Think for a moment. How much of the info you take in on a daily basis wasn’t provided to you because it contains actionable information but because someone else wants you to feel a certain way about it? The Clear Eyes, Full Hearts counsel for dealing with cartoons and games of pretend pretty simple. You don’t have to treat it like a cardinal sin any time an author, politician, consultant, adviser or expert tries to make you feel a certain way. Just don’t be the only one at the table who doesn’t realize what’s happening.