Truth Seeker or Truth Obscurer?

Great post by Barry Ritholtz, reproduced in whole here. Click the link on the title to go to The Big Picture website and check out the comments. A smart crowd there...

Seeking the Truth — Or Obscuring It?

By Barry Ritholtz - August 20th, 2010, 8:49AM

Over the past few weeks, I have posted on an eclectic assortment of items. That is keeping with the blog’s sub-title: Macro Perspectives on Capital Markets, Economy, Technology, and Digital Media. A few of you have made specific comments (and emails) about this recently.

I want to take a few moments to explain the thought process behind what appears to be a nearly random collection of posts, but actually is not. Instead, its part of a broader process. It ranges across a variety of disciplines, interests, methodologies.

The broader mission of what I try to do is seek the Truth.

I define “the Truth” as being in accord with objective reality. Philosophers have argued we can never achieve that degree of perfection, so to me it means getting as close as possible to the Truth as any slightly cleverer, pants-wearing monkey can.

I do this for three reasons: The first is that I am interested in it intellectually. I am aware that our individual universes are mere constructs of a sophisticated cognitive process, the evolutionary apex of this planet. I am also all too aware it is filled with flaws and biases and error. So few people seem to understand what objective reality is that it is a rarified space to even get near, much less inhabit.

This means venturing far and wide in search of “enlightenment.” No one discipline has a monopoly on the Truth, and very often a brilliant insight from one field can be applied in another. Hence, Behavioral economics, music, neurophysiology, methods of data-depiction (aka chart porn), market history, even automotive innovations all part of the multi-discipline process.

The second reason is professional: Fund managers whose universe deviate from reality eventually come to major losses, under-performance, and professional ruin. The most public version of this was likely Bill Miller: His failure to understand the derivative situation, creaky Housing edifice, and the artifice of the 2002-07 finance rally led his fund to load up on banks, GSEs, investment houses — and ruined an incredible record. There are many other examples, but this one is the most acute. Note there is a distinction between those who play probabilities that do not play out, and those whose world view is so flawed as to make losses all but inevitable.

I believe in Variant Perspective as an investment thesis: Identify where most of the investing public is objectively wrong; determine what the best approximation to reality is; factor in timing, and invest accordingly. Value investors do this when the buy undervalued stocks; they are saying the public is wrong about the lack of worth of an issue; short sellers do this as well, implicitly saying the opposite — that the public is overvaluing a stock, and making their bet.

One of the surprising things this blog has taught me about Reality is how long it takes to go viral. There are entrenched interests opposed to the truth, and they release their grip on their subjective fantasies very, very slowly.

When people said that Housing never falls in price, or that it is such a small part of the economy, and it could never have much impact, I push back against that error. Not a difference of opinion, mind you, but a cognitive failure on their part to hypothesize a probable or likely outcome. Years passed before the Truth became known. When the inverted Yield Curve as an omen of impending recession was dismissed as different this time, it invited my criticism. Erroneous discussions of cheap home builders, expensive tech stocks, low inflation, high employment were all subjects of discussions here.

There are 100s of such examples. Some people claim that nobody forecast a possible housing/derivative/market collapse. This is a lie to obscure their own failures. When the CRA or Fannie/Freddie are blamed for the economic crisis, I recognize this as false, a blatant attempt to obscure, rather than reveal the truth. Arguments talking up or down the economy usually have a specific agenda apart from the objective reality of the situation.

Which leads us to our headline: Seeking the Truth — Or Obscuring It?

I have explained my motivations as a truth seeker. It is intellectually stimulating, and it can be profitable. The major investment houses have for the most part abandoned it as part of their model, leaving that market niche open (to smaller, nimble firms like mine).

But what motivates people to pursue a narrative that is blatantly false, misleading or intellectually dishonest? Typically, it meets a powerful group’s specific agenda. There is a embedded interest amongst the powerful to preserve the status quo. The thought process seems to be “Hey, its working for us, let’s not mess up a good thing.”

We see this in a variety of areas: Politics are notorious for disregarding the Truth. Political objectives are to win votes, control public monies, amass power and influence. Truth is an obvious casualty in this process.

Amongst corporate interests, the Truth can get in the way of sales, earnings reports, and profitability, impacting careers, stocks prices and of course bonuses. Regulation reduced profits. Impacting the debate to achieve a desired outcome is worth billions, even if the consequences to society costs trillions.

Even academia is suffers from this error prone tendency to obscure the truth when it contradicts a long held theory or belief system. Look no further than the Efficient Market Hypothesis, and the way it was applied in real world discussions of policy, and self-regulation. Then consider the tortured route it took to go from the intellectual standard of academic capital market explanations to a partially discredited, somewhat outmoded belief system.

I initially mentioned three reasons. The third is simply that we live in a society where decision-making takes place with less and less reverence for the Truth, with terrible consequences. Those people who seek to obscure the Truth for personal gain do an enormous disservice to our nation. Public policy is made based on false pronouncements, monies are allocated based upon misleading arguments, laws are made, taxes levied, policy executed. The lives of 100s of millions of people is significantly impacted by our public policy.

When the entire edifice rests on falsehoods, mistruths, faulty assumptions, false premises, future outcomes, as we have seen over the past few years, can be horrific. History teaches us that eventually, the Truth will reveal itself. When that happens, there can be terrible consequences: Economies collapse, wars occur, empires crumble, millions die.

Whenever I read a major policy piece, newspaper article, or OpEd, I ask the following question: Is this person a truth seeker, or a truth obscurer? When you see nasty posts that dissect/shred/fisk these, it is because I was not happy with the answer to that question.

Are you a truth seeker, or a truth obscurer?
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