can be right for the wrong reasons or wrong for the right reasons,
but to the market you're just plain right or wrong.
Compare this to the story of the teacher who asks if anyone
in the class can name two pronouns. When no one volunteers,
the teacher calls on Tommy who responds, "Who, me?" To
the market, Tommy is right and therefore, despite being unlikely
to get an A in English, he's rich.
Guessing right about the market usually leads to chortling.
While waiting to give a radio interview at a studio in Philadelphia
in June 2002, I mentioned to the security guard that I
was writing this book. This set him off on a long disquisition
on the market and how a couple of years before he had received
two consecutive statements from his 401(k) administrator
indicating that his retirement funds had declined. (He
took this to be what in chapter 3 is called a technical sell signal.)
"The first one I might think was an accident, but two in
a row, no. Do you know I had to argue with that pension person
there about getting out of stocks and into those treasury
bills? She told me not to worry because I wasn't going to retire
for years, but I insisted 'No, I want out now.' And I'm
sure glad I did get out." He went on to tell me about "all the
big shots at the station who cry like babies every day about
how much money they lost. I warned them that two down
statements and you get out, but they didn't listen to me."
I didn't tell the guard about my ill-starred WorldCom experience,
but later I did say to the producer and sound man that
the guard had told me about his financial foresight in response
to my mentioning my book on the stock market. They
both assured me that he would have told me no matter what.
"He tells everyone," they said, with the glum humor of big
shots who didn't take his advice and now cry like babies.
Such anecdotes bring up the question: "If you're so smart,
why ain't you rich?" Anyone with a modicum of intelligence
and an unpaid bill or two is asked this question repeatedly.
But just as there is a distinction between being smart and being
rich, there is a parallel distinction between being right and
being right about the market.
Consider a situation in which the individuals in a group
must simultaneously choose a number between 0 and 100.
They are further directed to pick the number that they think
will be closest to 80 percent of the average number chosen by
the group. The one who comes closest will receive $100 for his
efforts. Stop for a bit and think what number you would pick.
Some in the group might reason that the average number
chosen is likely to be 50 and so these people would guess 40,
which is 80 percent of this. Others might anticipate that
people will guess 40 for this reason and so they would guess
32, which is 80 percent of 40. Still others might anticipate
that people will guess 32 for this reason and so they would
guess 25.6, which is 80 percent of 32.
If the group continues to play this game, they will gradually
learn to engage in ever more iterations of this metareasoning
about others' reasoning until they all reach the
optimal response, which is 0. Since they all want to choose a
number equal to 80 percent of the average, the only way they
can all do this is by choosing 0, the only number equal to 80
percent of itself. (Choosing 0 leads to what is called the Nash
equilibrium of this game. It results when individuals modify
their actions until they can no longer benefit from changing
them given what the others' actions are.)
The problem of guessing 80 percent of the average guess is a
bit like Keynes's description of the investors' task. What makes
it tricky is that anyone bright enough to cut to the heart of the
problem and guess 0 right away is almost certain to be wrong,
since different individuals will engage in different degrees of
meta-reasoning about others' reasoning. Some, to increase their
chances, will choose numbers a little above or a little below the
natural guesses of 40 or 32 or 25.6 or 20.48. There will be some
random guesses as well and some guesses of 50 or more. Unless
the group is very unusual, few will guess 0 initially.
If a group plays this game only once or twice, guessing the
average of all the guesses is as much a matter of reading
the others' intelligence and psychology as it is of following an
idea to its logical conclusion. By the same token, gauging investors
is often as important as gauging investments. And it's
likely to be more difficult.
Read More : Being Right Versus Being Right About the Market
