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Why Everyone Believes What They Want to Believe with Alex Edmans · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Hello, it's Maren sums
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Speaker 1: up Web. Here this week a really fascinating conversation with
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Speaker 1: author and professor Alex Edmonds. I really like Alex. I've
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Speaker 1: heard me speak a couple of times. I've wanted to
0:19
Speaker 1: have him on because there's so much misinformation, so much
0:22
Speaker 1: bias out there, and he's written a fabulous book called
0:25
Speaker 1: May Contain Lies, How story statistics and studies exploit our
0:29
Speaker 1: biases and what we can do about it. I mean,
0:31
Speaker 1: these days it probably should have been called Definitely Contains Lies,
0:35
Speaker 1: but we'll come to that. The book looks at how
0:37
Speaker 1: a bias has caused us to falls misinformation over and
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Speaker 1: over again and tells us what we can do about it,
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Speaker 1: which is something we all really need to know. But first,
0:46
Speaker 1: but first, we have not forgotten John. We always start
0:50
Speaker 1: this show with a really fascinating conversation with Money Distilled
0:53
Speaker 1: author John Steppeck. Sign up for his newsletter if you
0:55
Speaker 1: haven't already John Maddon. Interest rates. I know I said
1:00
Speaker 1: this was a really fascinating conversation, but interest rates, Oh
1:02
Speaker 1: my god, so boring?
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Speaker 2: Right, yeah, yeah, And the Bank England just made its
1:07
Speaker 2: latest great decision, and everyone was getting so excited because
1:11
Speaker 2: it's main It means you get a press conference and
1:13
Speaker 2: you get a minatory policy reporting loads and you forecasting.
1:17
Speaker 2: Oh my goodness, it was dull.
1:21
Speaker 1: Yeah, when you said everyone was getting excited, you didn't
1:23
Speaker 1: mean that, did you. That was kind of a little joke.
1:25
Speaker 2: Well, the problem is it's a news event. Is it
1:29
Speaker 2: is a news event. And I mean I've been on
1:31
Speaker 2: tell you more today than I have been in the past,
1:34
Speaker 2: kind of like mind and it's basically.
1:35
Speaker 1: Just say that I love it when you're intelligence.
1:38
Speaker 2: So the fans. Somebody tweeted me yesterday say I'm going
1:43
Speaker 2: on to mis mort saying what a handsome young man.
1:46
Speaker 2: I told him we needed an eye teste.
1:48
Speaker 1: That's thanks for.
1:51
Speaker 2: Radio exactly exact Facebook podcast anyways podcast.
1:55
Speaker 1: That's what we say these days, right to anyway. So
1:58
Speaker 1: the bank thing that have kept the bank great at
2:01
Speaker 1: do you know what? We're going to talk about this
2:02
Speaker 1: another day. But everyone just says bank rate, NPC kept
2:06
Speaker 1: bank rate. There should be a the in there, the
2:09
Speaker 1: bank rate. It's the same as when people say shares
2:11
Speaker 1: blah blah blah. It's not shares. The shares. People are
2:13
Speaker 1: constantly missing it out makes me upset. Anyway, bank rate
2:17
Speaker 1: has been kept at five point two five percent, which
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Speaker 1: is roughly where it has been for ages, and everyone
2:22
Speaker 1: expected this is the boring book. Almost everybody voted for
2:25
Speaker 1: a no change, although one extra person vote. We changed.
2:28
Speaker 1: Last time it was eight to one, right this time
2:30
Speaker 1: it was se slight change.
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Speaker 2: Yeah, yeah, I mean ever so slightly more dubvish. For
2:41
Speaker 2: if that's the eight what then things were? And it
2:44
Speaker 2: probably means that. I mean, I got feeling that if
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Speaker 2: the European Central Bank cuts early next month, as it's
2:51
Speaker 2: expected to do, and if the inflation figures for the
2:54
Speaker 2: next couple of months come in roughly and lane the podcasts,
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Speaker 2: then the bank will proply cut in June. But obviously
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Speaker 2: that's contingent on those things. I think they'll just want
3:07
Speaker 2: to cut at the same time as everyone else except
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Speaker 2: the fair to are know, in their own little kind
3:15
Speaker 2: the world of us exceptionalism a lot we'll see along
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Speaker 2: that lights because the jobless figures would actually watch them
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Speaker 2: expected today as well.
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Speaker 1: It's quite sweet, isn't it. They just want to cut
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Speaker 1: at the same time as everybody else. One would hope
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Speaker 1: they'd go for that independence thing. Anyways, The key point
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Speaker 1: that we need to be here isn't it is that
3:30
Speaker 1: when we talk about the Bank of England cutting I
3:32
Speaker 1: know we say this on pretty much every podcast, but
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Speaker 1: it's so important I'm going to say it again. When
3:38
Speaker 1: we talk about the Bank of England cutting rates, we
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Speaker 1: are not talking about them cutting rates from five and
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Speaker 1: a quarter percent to anywhere near two percent or one
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Speaker 1: percent or anything like that. Remember that with inflation, worried
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Speaker 1: is now what is inflation at the moment there.
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Speaker 2: Was three point two. It will probably be two point one.
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Speaker 1: Okay, So it was still well well over the target.
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Speaker 1: So real interest rates and inflation adjusted in rates are
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Speaker 1: still pretty low. And the idea here is that this
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Speaker 1: level of interest rates somewhere between four and five percent
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Speaker 1: is normal. If we end up going lower than that, again,
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Speaker 1: it'll be because something awful has happened. You don't want
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Speaker 1: interest rates to go below four percent. Again, it suggests
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Speaker 1: bad stuff's going on, right, So do not expect when
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Speaker 1: we talk about cuts, do not expect that to mean
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Speaker 1: the imortgage rate is going back to one and a
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Speaker 1: half percent. It just isn't.
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Speaker 2: And that's the really the important thing from a personal
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Speaker 2: fin nice point of view that it's kin of all
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Speaker 2: the mars.
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Speaker 1: We've had some house prece numbers out recently as well,
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Speaker 1: haven't we, John, So you know, with us knowing I think,
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Speaker 1: really knowing that interest rates and hence mortgage rates aren't
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Speaker 1: going to fall very dramatically. From here, we're seeing some
4:47
Speaker 1: weakening in the housing market. How's it looking?
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Speaker 2: Yeah, I think that is interesting because olver the first
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Speaker 2: quarter this year mortgage rates have actually going up, so
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Speaker 2: you could get a best buy five year effects for
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Speaker 2: the roundabout three point eight two point nine percent, and
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Speaker 2: now you're going to struggle to get below four point
5:03
Speaker 2: two percent. It's not much to that change, but it
5:07
Speaker 2: is an increase. And so actually monetary policy has tightened
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Speaker 2: for consumers this over the last quarter also the first
5:14
Speaker 2: quarter this year, and in turn I can see how
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Speaker 2: that might actually be making a few people a low
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Speaker 2: basically pollution the UK economy. From here, I can see
5:26
Speaker 2: how some people might be tightening their purse strings because
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Speaker 2: maybe in December they thought, oh, it's good, we're off
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Speaker 2: to the races again, whereas now they're like, oh, I
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Speaker 2: see what my mortgage is going to cost more than
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Speaker 2: I expected, or if I want to buy a house,
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Speaker 2: I'm going to have to save up more than I expected.
5:40
Speaker 2: And yet again it's another example how they kind of
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Speaker 2: housing market in this country being a complete capital sink
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Speaker 2: and something that we should try and get away from.
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Speaker 2: But I could see that that might have dented consumer
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Speaker 2: you know, kind of confidence and increased their propensity to
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Speaker 2: save a bit. But we'll see how that goes for
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Speaker 2: the rest.
5:59
Speaker 1: Of the year. Yeah, that goes all right. We will
6:01
Speaker 1: be coming back to the subjects of interest rates and
6:03
Speaker 1: the subjects of house prices over and over and over
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Speaker 1: again over the coming months. And of course it is
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Speaker 1: yet another area where you can look at the statistics
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Speaker 1: and you can make them tell you anything you want.
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Speaker 1: Welcome to Maren Talks Money, the podcast in which people
6:22
Speaker 1: who know the markets explain the markets. I'm Meren sumset
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Speaker 1: web Onto Alex. Alex is a professor of finance at
6:28
Speaker 1: London Business School. He's a PhD from MIT, is a
6:31
Speaker 1: Fulbright Scholar and was previously a tenured professor at Wharton
6:34
Speaker 1: and an investment banker at Morgan's Stanly impressive stuff. We
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Speaker 1: discussed this latest book may contain lies how stories, statistics
6:41
Speaker 1: and studies exploit our biases. Now, what we're going to
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Speaker 1: talk about today is a huge variety of things. But
6:47
Speaker 1: you've got this great new book out it's called May
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Speaker 1: contain lies how story, statistics and studies exploit our biases
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Speaker 1: and what we can do about it. And I think
6:55
Speaker 1: we probably all know that we're being exploited along the
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Speaker 1: way with all sorts of I mean, misinformation. But misinformation
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Speaker 1: is really just an opinion with numbers, isn't it.
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Speaker 3: It is so misinformation Often people think it's about getting
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Speaker 3: the facts right or wrong. So there could be an
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Speaker 3: absolute factual mistake or incorrect statement. But what I'm going
7:13
Speaker 3: to highlight is that even if the facts are one
7:15
Speaker 3: hundred percent accurate, they could still be misleading. So we
7:18
Speaker 3: could have a fact which is one showry picked example
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Speaker 3: which is not representative. Or we could have a correlation
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Speaker 3: that people sell as a causation even though it's some
7:28
Speaker 3: other factors which are driving both both effects.
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Speaker 1: So there's one of the things you talk about in
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Speaker 1: the book is the variety of things that we must
7:34
Speaker 1: be aware of when we are when we're looking at
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Speaker 1: a piece of information, or we think it's a piece
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Speaker 1: of real information, when we're looking at what we think
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Speaker 1: is a fact when we're looking at the results of
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Speaker 1: what we think is an unbiased study. And the first
7:46
Speaker 1: and most obvious one, which of course everyone knows about,
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Speaker 1: is confirmation bias. If you think you know something already,
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Speaker 1: we think you feel strongly about something one way or another,
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Speaker 1: then you tend to only look at information that backs
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Speaker 1: thatt up up and dismiss all information that doesn't follow
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Speaker 1: the bias you already have. We're all guilty of that, right,
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Speaker 1: It's almost impossible not to be guilty of it absolutely.
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Speaker 3: And the reason why we're all guilty of this is
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Speaker 3: it's deeply wide into our brain. So if we see
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Speaker 3: something that we do then it releases dopamine in our brain.
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Speaker 3: It just feels good, so we don't want to question it.
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Speaker 3: We want to shout it from the rooftop, share it
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Speaker 3: with other people without even checking the methodology. But if
8:23
Speaker 3: we see something we don't like, this triggers the amigdala,
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Speaker 3: that's the part of the brain that induces a fight
8:29
Speaker 3: or flight response. So we respond to information we don't
8:33
Speaker 3: like as if we're being attacked by a tiger. We
8:35
Speaker 3: might not even read it, or if we read it,
8:37
Speaker 3: we might read it with the mindset of trying to
8:39
Speaker 3: pick it apart. So we respond to information based on
8:42
Speaker 3: its appeal, not its accuracy.
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Speaker 1: Okay, so when we try and fight confirmation bias, we're
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Speaker 1: fighting the chemicals in our own brain at the same time,
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Speaker 1: so it's really hard. So then you go on to
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Speaker 1: talk about how the first part of this is biased interpretation.
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Speaker 1: We look at information and we're going to interpret it
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Speaker 1: in the way that we want to interpret it when
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Speaker 1: we get under blinked skepticism motivated reasoning, and I want
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Speaker 1: to talk about those two parts of it a little bit.
9:06
Speaker 1: It's interesting because one of the points you make is
9:09
Speaker 1: that I would instinctively believe, and I think most people
9:13
Speaker 1: would instinctively believe, that knowledge helps you overcome this stuff.
9:17
Speaker 1: I'm a constantly mean to hold an we on the internet,
9:19
Speaker 1: on social media to educate ourselves, as though the more
9:22
Speaker 1: we learn, the more we understand, the more capable we
9:26
Speaker 1: will be of preventing ourselves falling prey to our own
9:29
Speaker 1: confirmation bias. But in fact, what I've learned or I
9:34
Speaker 1: think I've learned from the bugg is that's not actually true.
9:36
Speaker 1: Knowledge can be even more dangerous.
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Speaker 3: Absolutely right, And this seems quite strange because you might
9:42
Speaker 3: think the more knowledgeable you are, the more likely you
9:44
Speaker 3: are to spots and mistakes. But unfortunately, what the evidence
9:47
Speaker 3: suggests is that we deploy our knowledge selectively. So if
9:51
Speaker 3: there's a study whose findings we don't like, we can
9:54
Speaker 3: come up with all sorts of explanations as to why
9:56
Speaker 3: it might be correlation without causation why they might be
9:59
Speaker 3: method oology mistakes, methodological mistakes in this and this isnt
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Speaker 3: need what I see on LinkedIn. So if I share
10:05
Speaker 3: a study that people don't like the sound of, there's
10:08
Speaker 3: no shortage of comments as to why this study might
10:11
Speaker 3: be flimsy. But we deploy our knowledge only selectively, So
10:15
Speaker 3: when there's a study that we do like, we latch
10:17
Speaker 3: onto this and we accept it uncritically.
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Speaker 1: Yeah, so we use a knowledge that we do have
10:22
Speaker 1: to pick hold in the opposite argument rather than to
10:25
Speaker 1: pick hold in our own biases.
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Speaker 3: Unfortunately, Yes, and again, why is this because it makes
10:31
Speaker 3: us feel good? If indeed we're using our knowledge to
10:33
Speaker 3: make ourselves feel good, we'll use this to try to
10:36
Speaker 3: cancel a study that would otherwise trigger our and migdala.
10:39
Speaker 3: And if it's a study that releases dopamine. Then we
10:42
Speaker 3: will just accept it, and we might come up with
10:44
Speaker 3: all sorts of reasons as to why this is a
10:46
Speaker 3: rigorous study. So this is really important because many listeners
10:49
Speaker 3: might think, Okay, all these basic mistakes. You might think
10:52
Speaker 3: of really flagrant examples of misinformation, like the gentlemen who
10:57
Speaker 3: drank fish tank cleaner because apparently Donald Trump recommended chloroquin
11:02
Speaker 3: as a cure for the coronavirus. You might think, Okay,
11:05
Speaker 3: we're not gonna make big mistakes like that. But unfortunately,
11:09
Speaker 3: some of the major mistakes are made by some of
11:11
Speaker 3: the most reliable, one of the most senior people. One
11:15
Speaker 3: example might be the decision to invest in Theerinos. So
11:18
Speaker 3: the investors include people like George Schultz, the former Secretary
11:21
Speaker 3: of State. These are people who'd got to the top
11:24
Speaker 3: through a lifetime of checking the facts. But when you
11:28
Speaker 3: get a story, people want to be true. This charismatic
11:32
Speaker 3: visionary who dropped out of Stanford to triumph in a
11:34
Speaker 3: man's world, and also not just to make money but
11:37
Speaker 3: transform people's lives by diagnosing a lot of illnesses. People
11:41
Speaker 3: just believed it. They gave Theeronos a nine billion dollar
11:44
Speaker 3: evaluation without even checking whether the technology worked.
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Speaker 1: And this was absolutely extraordinary, wasn't it. They were told
11:53
Speaker 1: that there was a black box and that would do
11:55
Speaker 1: the thing, and they didn't have to worry about anything else.
11:57
Speaker 1: They didn't look for proper data. They didn't look to
12:01
Speaker 1: see even the improper accounts, did they. They genuinely saw nothing,
12:05
Speaker 1: even people sitting on the board. It was the most
12:07
Speaker 1: extraordinary example of people wanting to believe something because it
12:12
Speaker 1: so badly wanted it to be true. That's all.
12:14
Speaker 3: It was, right, absolutely, And actually some people did ask
12:17
Speaker 3: for the accounts, and when they were not given the accounts,
12:19
Speaker 3: they just invested anyway. So they just said, Okay, we
12:22
Speaker 3: don't really need this is such a success story. We're
12:26
Speaker 3: just getting in the way and hindering the process by
12:28
Speaker 3: asking for some extra information. They really wanted it to
12:31
Speaker 3: be true. And these are leading investors, leading politicians fell
12:35
Speaker 3: for this mistake.
12:37
Speaker 1: It's interesting you give another example right at the beginning
12:39
Speaker 1: of the book. I'm lest in the even in the
12:41
Speaker 1: introduction about CEO pay and the gap between CEO pay
12:46
Speaker 1: and overall pay, so the relativity of pay within an organization,
12:50
Speaker 1: and you talk about how your own work was misinterpreted
12:53
Speaker 1: because someone wanted it to be the other way around,
12:56
Speaker 1: and that was misinterpreted at the very beginning. You tell
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Speaker 1: us about that because that's very topic in the UK
13:00
Speaker 1: at the moment.
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Speaker 3: Yeah, so this is a pretty striking story. So a
13:03
Speaker 3: few years ago I was summoned to testifying the House
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Speaker 3: of Commons because there was an inquiry on corporate governance
13:09
Speaker 3: prompted by some scandals like BHS and Sports Direct. And
13:13
Speaker 3: because this is a big thing, I thought i'd get
13:15
Speaker 3: to the session early and swat up on all the
13:17
Speaker 3: questions the committee might ask me. And when I was
13:21
Speaker 3: in the earlier session, I heard the witness say something
13:24
Speaker 3: which sounded noteworthy. They claimed that the smaller the gap
13:28
Speaker 3: between CEO pay and worker pay, the better the company performance.
13:33
Speaker 3: So greater equality is good for employee are out And
13:37
Speaker 3: that's actually consistent with some of my own work, which
13:39
Speaker 3: looks at the benefits of treating employees fairly. So I
13:42
Speaker 3: really wanted it to be true, but being a self
13:46
Speaker 3: respecting academic, I couldn't just take the witness's word for it.
13:49
Speaker 3: I wanted to look it up for myself, so I
13:52
Speaker 3: looked at the study which they were citing, which I
13:54
Speaker 3: could see because they had submitted some written evidence, and
13:57
Speaker 3: then the study seemed to say completely the opposit, the
14:00
Speaker 3: lower the gap between CEO pay and worker pay, the
14:04
Speaker 3: worse the performs. And I suddenly dawn on me what
14:07
Speaker 3: had happened. What the witness had done was they quoted
14:10
Speaker 3: a half finished study when I was looking at the
14:13
Speaker 3: finished version which had gone through peer review and corrected
14:16
Speaker 3: out its mistakes. And so I think this teachers us
14:19
Speaker 3: two things. So so number one, any piece of evidence,
14:23
Speaker 3: even if it's something submitted to a government inquiry, and
14:26
Speaker 3: this actually got published by the House of Commons afterwards,
14:29
Speaker 3: it is prone to biases, it can have mistakes. It's
14:32
Speaker 3: written by humans, and humans might be biased. And number two,
14:35
Speaker 3: it highlights how you can almost always find some evidence
14:39
Speaker 3: to support what you'd like to support, even if it's
14:43
Speaker 3: been overturned because it's a half finished study. So here
14:46
Speaker 3: the witness in question was the Trades Union Congress. They
14:50
Speaker 3: had a strong public position against CEO pay, so they
14:54
Speaker 3: latched on to a study because it found the result
14:57
Speaker 3: they wanted, which was that high pay gaps were So
15:00
Speaker 3: we often hear these phrases. Evidence shows that research finds
15:04
Speaker 3: that studies prove that studies include almost anything. You can
15:08
Speaker 3: find any study to support whatever you want to support.
15:11
Speaker 3: So what matters is the quality of the study, not
15:14
Speaker 3: just its existence.
15:16
Speaker 1: Interesting, now, there's a lot of talking that papers in
15:18
Speaker 1: the UK at the moment about exactly that's about fifty
15:21
Speaker 1: one hundred buses in particular being underpaid relative to their
15:24
Speaker 1: US counterparts. And how important is it that we should
15:27
Speaker 1: try and get CEO pay up in the UK before
15:30
Speaker 1: they all disappeared to the US where they can impulse
15:33
Speaker 1: more money and have much better particularly long term incentive plants.
15:36
Speaker 1: Given the work that you've done and what you know
15:39
Speaker 1: about this, but that seem reasonable. Should it be that
15:42
Speaker 1: we should, just as shareholders, all of us, should give
15:44
Speaker 1: up on getting cross about top executives earning too much
15:48
Speaker 1: and just say that they're more, they earn the better,
15:50
Speaker 1: because that incentivizes them to be better CEOs and UK
15:53
Speaker 1: companies will become better run and maybe that will close
15:56
Speaker 1: the evaluation gap in itself or is that pushing it?
15:59
Speaker 3: That's that's what my research tends to suggest, and it's
16:01
Speaker 3: also not just my research but the research of a
16:04
Speaker 3: general body of scholars who look into this. So what
16:07
Speaker 3: should the goal of CEO pay be so one goal
16:10
Speaker 3: will be to keep CEO pay down. Under the idea
16:13
Speaker 3: that's at the expense of shareholders, anything that you pay
16:16
Speaker 3: the CEO comes out of long term returns. But that
16:19
Speaker 3: assumes what I'm calling the fixed pie mentality, that suggests
16:23
Speaker 3: that the value that the CEU creates is a fixed pie.
16:26
Speaker 3: Anything that you give to the CEO is at the
16:29
Speaker 3: expense of shareholders. But in fact the pie can be grown.
16:32
Speaker 3: Evidence suggests that if you have a properly incentive by
16:35
Speaker 3: CEO one who owns a large skin in the amount
16:38
Speaker 3: of skin in the game, then this improves firm performance
16:41
Speaker 3: by four to ten percentage points. Well, that's a huge
16:45
Speaker 3: amount of money. If you compare that to the average
16:47
Speaker 3: amount of CEO pay compared to firm value, it's peanuts.
16:50
Speaker 3: It's something like zero point one percent. So really the
16:53
Speaker 3: goal of pay design should be to encourage the CEO
16:57
Speaker 3: to create long term value, to grow the pie, not
17:00
Speaker 3: so much to cut the level of CEO pay. Now,
17:03
Speaker 3: detractors will argue.
17:04
Speaker 1: Well, so can I just go back and ask you
17:06
Speaker 1: when you give us that number over what time frame
17:08
Speaker 1: do you mean for to eleven percent on what does
17:10
Speaker 1: long term mean in this context?
17:12
Speaker 3: So this is per year. So what the study did
17:15
Speaker 3: was it looked at a sess of companies where the
17:17
Speaker 3: CEO owns a large steak in her firm, and they
17:20
Speaker 3: looked at companies where the CEO's little steak in the firm.
17:23
Speaker 3: And what they found is that the former beats the
17:25
Speaker 3: latter by four to ten percentage points per year. And
17:29
Speaker 3: they do further test to suggest that it's causation, not commination.
17:33
Speaker 3: So this is annual out performance. This is big. It's
17:36
Speaker 3: much bigger than how much money you could save by
17:39
Speaker 3: cutting the ceopay.
17:40
Speaker 1: A little bit, okay, And it couldn't possibly be the
17:44
Speaker 1: case that when a CEO is doing really well, that's
17:48
Speaker 1: the opportunity for him to go and ask for one
17:51
Speaker 1: of these incentive programs that will make him a fortune.
17:54
Speaker 1: So it's the doing well that brings on the incentive
17:56
Speaker 1: rather than the incentive that brings on the being well.
17:58
Speaker 1: Do you see what I've learned from you book? Already?
18:00
Speaker 1: There's literally nothing you can say that I'm not going
18:02
Speaker 1: to find some way to come back.
18:04
Speaker 3: At absolutely, And it's great that you're skeptical, because again,
18:07
Speaker 3: with any study, we might try to interpret it consistent
18:11
Speaker 3: with our biases. And if our view is that CEOs
18:14
Speaker 3: deserve their high pay, then we might latch onto that explanation.
18:17
Speaker 3: But as you say, Eron, there's an alternative explanation. Maybe
18:20
Speaker 3: the CEO knows how well her company is going to perform,
18:23
Speaker 3: and when she knows that the company's going to do well,
18:26
Speaker 3: she goes to the board and says, hey, pay me
18:28
Speaker 3: with some stock. And if she knows that the company's
18:31
Speaker 3: going to do badly, she goes to the board and says,
18:33
Speaker 3: pay me with cash instead. So then it's future performance
18:37
Speaker 3: that drives current pay rather than current pay that drives
18:41
Speaker 3: future performance. So how does the study try to disentangle this?
18:45
Speaker 3: What they look at are settings in which ceop is
18:49
Speaker 3: much more important for incentives because the CEO might otherwise
18:53
Speaker 3: slack off. So those are companies where there's little institutional ownership,
18:58
Speaker 3: so you don't have shareholders monitoring the CITTA, you know.
19:00
Speaker 3: Those the industry where's there's little product market competition. Those
19:04
Speaker 3: are also poorly government companies. Those are the cases in
19:08
Speaker 3: which the link between CEO pay and long term future
19:11
Speaker 3: performance is strongest, and that suggests that it's ceopay which
19:15
Speaker 3: is causing the outcomes rather than just being predictive of
19:18
Speaker 3: those outcomes.
19:19
Speaker 1: Alex, I wanted to ask you while we're on this
19:21
Speaker 1: kind of confirmation conversation about diversity, which is something you've
19:26
Speaker 1: also written about a lot, and it's another place where
19:28
Speaker 1: a lot of people have fallen down over the last
19:31
Speaker 1: decade or so of wanting so much for it to
19:34
Speaker 1: be true that if a company has a more diverse
19:38
Speaker 1: hiring policy, or if a company has a more diverse board,
19:41
Speaker 1: that they will automatically do better. And so we've seen
19:45
Speaker 1: a lot of studies that have come out saying, look,
19:47
Speaker 1: companies with diverse boards perform beer to gender diversity or
19:51
Speaker 1: ethnic diversity perform better than companies that do not. And
19:54
Speaker 1: we've all really wanted to believe that, but in fact
19:56
Speaker 1: it turns out that there's very little substance behind that.
19:59
Speaker 1: Is that another example of where we've gone slightly wrong
20:02
Speaker 1: in wanting something to be true so much that we
20:05
Speaker 1: perhaps adjust our research or our beliefs to let it
20:08
Speaker 1: be true.
20:09
Speaker 3: It unfortunately is And I think that the desire to
20:12
Speaker 3: show a positive link between diversity and firm performance is
20:15
Speaker 3: so strong that the mistakes in these studies are even
20:18
Speaker 3: more basic. Yet people lap them up uncritically. And I'm
20:22
Speaker 3: an ethnic minormity myself. I would love to believe the results,
20:25
Speaker 3: but unfortunately they make the most basic errors. As you say, Moren,
20:28
Speaker 3: there's no shortage of studies claiming that there's a proven,
20:32
Speaker 3: indisputable relationship. McKinsey had a series of three studies Diversity Matters,
20:38
Speaker 3: Delivering through Diversity and Diversity Wins. The last one said
20:41
Speaker 3: the business case for gender and ethnic diversity in top
20:44
Speaker 3: teams is stronger than ever, and then they double down.
20:47
Speaker 3: They released another study last year saying diversity matters even more,
20:51
Speaker 3: the diversity premium is even greater. Recently the Financial Reporting Council,
20:56
Speaker 3: so this is the regulator, so what they put out matters.
20:59
Speaker 3: It might also AFFEC laws. They interviewed some chairs and
21:02
Speaker 3: one said there have been enough reports, statistics, an evidence
21:06
Speaker 3: space research to stop talking about it and get on
21:09
Speaker 3: with it. Another chair said, I don't want to see
21:12
Speaker 3: any men. I don't care if they're Jesus Christ. I
21:15
Speaker 3: don't want to see that there were those strong statements.
21:18
Speaker 3: What did the report actually find? So for the Financial
21:21
Speaker 3: Reporting Council report, what they did was they looked at
21:25
Speaker 3: ninety different tests relating diversity to firm performance. They concluded
21:32
Speaker 3: that higher gender diversity is positively colllated with better future
21:37
Speaker 3: financial performance. Not a single of those tests found a
21:42
Speaker 3: positive result, so they basically just claimed a result that
21:46
Speaker 3: wasn't there. And there are tons of headlines and newspapers
21:49
Speaker 3: and also by organizations promoting this result helding this result,
21:53
Speaker 3: but without even checking the tables in the own paper
21:57
Speaker 3: to check whether they gave the results that claim. So
22:00
Speaker 3: this is not even something about correlation versus causation or
22:04
Speaker 3: quibbled with the methodology. Even if you believe the methodology
22:09
Speaker 3: is one hundred percent accurate, it did not deliver the
22:12
Speaker 3: results the FRC was claiming. And with McKinsey, there's a
22:15
Speaker 3: whole host of problems with their studies, one of them
22:19
Speaker 3: being that they look at diversity in twenty twenty two
22:24
Speaker 3: versus financial performance in twenty seventeen to twenty twenty one.
22:29
Speaker 3: So if there is any relationship, it could be financial
22:32
Speaker 3: performance that leads to diversity rather than diversity leading to
22:37
Speaker 3: financial performance. So with these basic errors, you might think,
22:42
Speaker 3: Number one, why would these organizations put up such studies
22:46
Speaker 3: which expose them to reputational risks, and number two, why
22:49
Speaker 3: do people fall for it? Why you put out these
22:51
Speaker 3: studies is because this gives a result that people want
22:54
Speaker 3: it to be true. They probably won't notice these mistakes
22:58
Speaker 3: and you're going to boost your reputation because that is
23:01
Speaker 3: something which gives you a good image if you're seen
23:04
Speaker 3: to be a proponent of diversity. And then why do
23:07
Speaker 3: people want to be through? And these people could be bored.
23:09
Speaker 3: These could be investors because they would like to believe
23:12
Speaker 3: that diverse organizations are better off. If they are voting
23:15
Speaker 3: for particular directors who are female or ethnic minorities, they
23:19
Speaker 3: want to believe they're doing well and doing good. And
23:22
Speaker 3: also it's easy. What it suggests that all they need
23:26
Speaker 3: to do to assess whether a director is good is
23:28
Speaker 3: to look at his, her gender and ethnicity. They don't
23:32
Speaker 3: need to bother assessing their cognitive diversity skills anything else.
23:36
Speaker 3: We can reduce the humanity, the totality of a person
23:40
Speaker 3: to just their gender and just their ethnicity.
23:43
Speaker 1: Is there evidence that if we test for cognitive diversity
23:47
Speaker 1: we can see improved financial performance at companies?
23:50
Speaker 3: Fortually, the measures of cognitive diversity are rather situation specific.
23:55
Speaker 3: So cognitive diversity is your thinking style. And so there
23:58
Speaker 3: are some tests which are pretty well respected in the
24:00
Speaker 3: academic literature which look at interpreting, say visual information, but
24:05
Speaker 3: that might not be so important in a boardroom because
24:08
Speaker 3: it might be that you're looking at financial information or
24:10
Speaker 3: discussing strategy. But what I do with some other co
24:13
Speaker 3: authors in another paper is I look at diversity, equity
24:17
Speaker 3: and inclusions. So what this looks at is not just
24:20
Speaker 3: cognitive or demographic diversity, but do you make people feel valued?
24:25
Speaker 3: Do you have a corporate culture that encourages dissent? And
24:29
Speaker 3: what we find is two striking things. Number one, demographic
24:32
Speaker 3: diversity bear almost no relation to this broader measure of DEI,
24:38
Speaker 3: suggesting that all of these measures that investors and boards
24:41
Speaker 3: are focusing on, they are shooting at the wrong target.
24:44
Speaker 3: What people are assessing companies on the basis of is
24:47
Speaker 3: actually unrelated to what really matters true DEI. And the
24:51
Speaker 3: second result is that, confirming earlier papers, we find no
24:55
Speaker 3: link between demographic diversity and firm performance. But we do
25:00
Speaker 3: find a link between DEI and better future financial performance,
25:05
Speaker 3: again suggesting we need the broader measure, not the simple
25:08
Speaker 3: box ticking.
25:08
Speaker 1: Measure that can we extend what we've just been talking
25:12
Speaker 1: about across the ESG spectrum as a whole, because one
25:16
Speaker 1: of the other things it's been a big part of
25:18
Speaker 1: the investment world over the last decade, has been this
25:21
Speaker 1: idea that ESG this sort of rather vague thing that
25:25
Speaker 1: encompasses everything that anyone might feel is vaguely good, that ESG.
25:29
Speaker 1: If you can invest in companies with good ESG metrics,
25:33
Speaker 1: you will outperform. That's been taken as a given until
25:36
Speaker 1: relatively recently, the last couple of years. I think that
25:38
Speaker 1: faith is beginning to fall away, and was saying much
25:41
Speaker 1: lower inflows from fact, quite big outflows from some of
25:44
Speaker 1: the ESG areas. So is it the case that a
25:47
Speaker 1: lot of those studies were not really very well done
25:50
Speaker 1: as well?
25:51
Speaker 3: It is, unfortunately, And why again I say unfortunately, memory
25:54
Speaker 3: is that I would love these studies to be true.
25:56
Speaker 3: So I am generally a proponent of ESG.
25:59
Speaker 1: I think we all we would all love them to
26:01
Speaker 1: be true. Wouldn't it be wonderful if you could somehow
26:03
Speaker 1: prove that that doing good could bring better financial performance automatically?
26:09
Speaker 1: They would be great. Of course, everyone would love to
26:10
Speaker 1: believe that.
26:11
Speaker 3: Yeah, you could save the planet. You could save the dolphins,
26:13
Speaker 3: you could claim save the common weaves, and also get
26:16
Speaker 3: lots of money at the end, you don't need to
26:17
Speaker 3: deal with awkward things such as trade offs between financial
26:21
Speaker 3: and social value. And I gon this is I think
26:23
Speaker 3: why a lot of these studies have resonated and been
26:26
Speaker 3: widely shared, and they make the most basic errors. So again,
26:31
Speaker 3: let me not go over correlation causation, because that's something
26:34
Speaker 3: which was true and diversity. But one particular problem with
26:38
Speaker 3: the SG is, as you mentioned Mement, it's really difficult
26:41
Speaker 3: to measure, and so many of these measures are actually
26:44
Speaker 3: pretty much performance measures anyway. So if you claim that
26:48
Speaker 3: ESG is linked to performance, it's circular. So one example
26:52
Speaker 3: is this book called Firms of Endearment, which is widely shared, circulated,
26:57
Speaker 3: often quoted at me when I'm having discussions on this topic.
27:00
Speaker 3: And what they wanted to look at was the performance
27:03
Speaker 3: of companies with quote humanistic performance meeting the needs of
27:08
Speaker 3: stakeholders other than shelves. But if you look as to
27:12
Speaker 3: how they identified those companies, what they did, in though
27:16
Speaker 3: their own words, was ask people, tell us about some
27:18
Speaker 3: companies you love, not just like, but love, But what
27:24
Speaker 3: are the companies that people are most likely to love,
27:26
Speaker 3: these will be just highly successful companies. So people might say,
27:29
Speaker 3: we love Amazon, it's a customer centric company. We might
27:32
Speaker 3: love this company if we're an investor. One could argue,
27:35
Speaker 3: is this actually positive for wider society. I know there's
27:38
Speaker 3: a lot of concerns about labor, for example, But if
27:41
Speaker 3: you're asking people to find companies based on whether you
27:45
Speaker 3: love them, then a successful company will be part of bucket.
27:49
Speaker 3: And so this is something known as a halo effect.
27:51
Speaker 3: So if you're asking people to report what companies they like,
27:55
Speaker 3: even if you explicitly say we're trying to look at
27:58
Speaker 3: conscious capitalism or yes, they're going to find successful companies.
28:02
Speaker 3: And so basically these papers find successful companies are successful,
28:07
Speaker 3: and then you have all of the other problems that
28:09
Speaker 3: we've discussed with correlation causation, but in a different way.
28:12
Speaker 3: One of the other concerns will be if ESG outperforms,
28:16
Speaker 3: how do we know it's ESG but not something else.
28:19
Speaker 3: So in the pandemic, you saw ESG stocks out performing,
28:23
Speaker 3: But as you highlighted in your own work, Maren, so,
28:25
Speaker 3: these could just be some tech firms beating fossil fuel companies.
28:31
Speaker 3: This is just a set to effect, nothing to do
28:34
Speaker 3: with the ESG in particular.
28:36
Speaker 1: Yeah, the other thing that the whole ESG conversation does
28:40
Speaker 1: is plays into another part of your book where you
28:42
Speaker 1: talk about black and white thinking. And one of the
28:45
Speaker 1: problems that we've run into with getting ESG involved in
28:49
Speaker 1: the conversation about investing has become very black and white,
28:51
Speaker 1: and again that feels like it's beginning to fade away.
28:54
Speaker 1: For example, there was a period when anyone who is
28:57
Speaker 1: even faintly ESG orientated wouldn't dare to dream of investing
29:01
Speaker 1: in in anything to do with the defense industry. But
29:03
Speaker 1: obviously we've become much more nuanced in our thinking around
29:05
Speaker 1: that over the last couple of years. And it's the
29:07
Speaker 1: same with fossil fuels, right so until I should probably
29:10
Speaker 1: still most people with an ESG labor will not want
29:12
Speaker 1: to be invested in the fossil fuel industry. But of
29:15
Speaker 1: course there are a lot of gray areas here, right,
29:18
Speaker 1: so we fall into this fallacy, that the fallacy black
29:20
Speaker 1: and white thinking very much when we get involved in
29:23
Speaker 1: talking about ESG.
29:24
Speaker 3: Absolutely, and I think black and white thinking can be
29:26
Speaker 3: applied in three different ways when it comes to ESG,
29:30
Speaker 3: So one is viewing some industry as always good or
29:33
Speaker 3: always bad, as you've highlighted. So previously defense was seen
29:37
Speaker 3: as always bad, and then now people realize that that's
29:39
Speaker 3: actually not as it's much more nuanced than that, the
29:42
Speaker 3: same with fossil fuels. But again, it's easy if we
29:46
Speaker 3: viewed an entire sector as being bad, because that just
29:49
Speaker 3: makes the decision problem simpler for a sustainable investor. You
29:53
Speaker 3: just ignore a particular industry without having to consider particular nuances.
29:58
Speaker 3: The second way in which people can think in black
30:00
Speaker 3: and white terms is they think that more is always better.
30:04
Speaker 3: So if ESG is a good thing, then the more
30:06
Speaker 3: green you are, the better the financial performance, and so
30:10
Speaker 3: we want to buy the most highly rated companies.
30:12
Speaker 2: But this is not.
30:13
Speaker 3: True, right, Anything else in business or economics has diminishing returns.
30:18
Speaker 3: More investment is not always better because you could be
30:22
Speaker 3: engaged in unproductive evidence. But because ESG has this hailo
30:25
Speaker 3: around it, people think it defies the laws of gravity,
30:28
Speaker 3: or at least the laws of basic economics, that there
30:31
Speaker 3: is no such thing as diminishing returns. And the third
30:34
Speaker 3: issue is that people believe that ESG is one big,
30:38
Speaker 3: homogeneous entity, so that we can treat everything with an
30:43
Speaker 3: ESG as being always good. So why did I get
30:46
Speaker 3: into this topic myself. One of my early papers showed
30:49
Speaker 3: that companies that treat their work as well do better,
30:53
Speaker 3: and that was interpreted as an ESG paper because taking
30:57
Speaker 3: care of your workers is believed to be sustainable. However,
31:01
Speaker 3: people then said, this guy Alex Edmunds had proven that
31:04
Speaker 3: ESG pays off, but I hadn't done anything of that sort.
31:07
Speaker 3: I looked at one specific dimension of ESG, which is
31:10
Speaker 3: human capital and corporate culture. This did not mean that
31:14
Speaker 3: catholic values or biodiversity impact all of these other factors
31:18
Speaker 3: necessarily outperform. You do need to have separate studies on
31:22
Speaker 3: those topics rather than believing that everything is under a
31:25
Speaker 3: single umbrella.
31:26
Speaker 1: Okay, so, based on your research so far, what do
31:29
Speaker 1: you it that makes a company outperform? What are the
31:31
Speaker 1: factors that you believe from your work so far that
31:36
Speaker 1: will really cause a company to do better than other companies.
31:40
Speaker 3: It's investing in assets that are financially material. Why did
31:45
Speaker 3: I look at employee satisfaction in my paper? This was
31:49
Speaker 3: I believe that human capital to be a really important
31:51
Speaker 3: driver of financial performance. My first job was at Morgan Stanley,
31:56
Speaker 3: and that was the job in which really corporate culture
31:59
Speaker 3: shouldn't matter. As a twenty one year old analyst, you
32:02
Speaker 3: should be motivated by the bonuses, the prospect of promotion.
32:05
Speaker 3: That was massive for a twenty one year old, but
32:08
Speaker 3: that wasn't enough. How your boss treated you. Small things
32:12
Speaker 3: such as whether you were taking too meetings that made
32:14
Speaker 3: a huge impact. So when I got to MIT and
32:17
Speaker 3: did my PhD, while everybody else was looking at tangible
32:20
Speaker 3: drivers of performance such as plants and machines, buildings, I
32:24
Speaker 3: wanted to look at the human factor. So that was
32:27
Speaker 3: something where there was business logic for why that might
32:30
Speaker 3: lead to our performance. But for other ESG factors the
32:34
Speaker 3: business logic might not be so clear. So why might
32:37
Speaker 3: catholic values lead to out performance that's not as logical.
32:42
Speaker 3: Or another thing might be that certainly ESGIE fractors are
32:45
Speaker 3: good for wider society, but they're not necessarily material to
32:50
Speaker 3: the company that's responsible. For example, if you think about
32:52
Speaker 3: climate change, a company that reduces it's carbon emissions, they're
32:57
Speaker 3: doing good stuff for wider society, but in the absence
33:00
Speaker 3: of a carbon tax, it might not be that the
33:03
Speaker 3: company ultimately will be benefiting from MIT's investments. Now, when
33:08
Speaker 3: I talk about financial materiality, people don't like this because
33:11
Speaker 3: they say, well, isn't that a bit instrumental? Only if
33:13
Speaker 3: you do things that are ultimately good for the company
33:17
Speaker 3: will this lead to enhance returns. But this is what
33:20
Speaker 3: the evidence is suggesting, and this is also what business
33:23
Speaker 3: logic suggests. It's not that you can do good indiscriminately
33:27
Speaker 3: and then trust good karma to allow this to bounce
33:30
Speaker 3: back and show up in long term profits.
33:33
Speaker 1: Can I ask you about where you think we're making
33:36
Speaker 1: the biggest mistakes at the moment. What are the things
33:39
Speaker 1: that we believe that we want so much to be
33:42
Speaker 1: true today? And we've talked about quite a lot of
33:44
Speaker 1: the things. But is there anything that we haven't talked
33:46
Speaker 1: about that we so much want to be true that
33:48
Speaker 1: we've all convinced ourselves it is true? But there is
33:51
Speaker 1: no genuine evidence of dore anything new coming on to
33:55
Speaker 1: your radio. Way you're thinking, actually no, maybe not.
33:59
Speaker 3: Yes, So unfortunately that these issues are way beyond business
34:02
Speaker 3: and investing. So we've talked about business and investing examples
34:06
Speaker 3: given the audience, But the idea of misinformation can spread
34:09
Speaker 3: to just daily life. So one example is the effect
34:13
Speaker 3: of breastfeeding on child development. So before my wife and
34:16
Speaker 3: I had out our son, we went to a National
34:19
Speaker 3: Childbirth Trust course, which is otherwise excellent, but it highlighted
34:23
Speaker 3: the importance of breastfeeding. It cited some World Health Organization
34:27
Speaker 3: studies claiming that you need to exclusively breastfeed, no formula,
34:33
Speaker 3: no water, no other liquids for the first six months.
34:35
Speaker 3: Why because there's conclusive evidence that breastfed children have high
34:41
Speaker 3: IQ also higher performance on physical and health outcomes. They're
34:45
Speaker 3: not restped participants. And again this plays into confirmation by us,
34:49
Speaker 3: because confirmation bi us needn't be as strong and as
34:52
Speaker 3: ideological as something like diversity or sustainability. Even a small
34:57
Speaker 3: hunch that's something natural is than something man made that
35:01
Speaker 3: can be enough to trigger our biases and mean that
35:04
Speaker 3: we don't question it. But then when you look into
35:07
Speaker 3: the data a little bit more deeply, what you find
35:10
Speaker 3: is that breastfed children are just different from non best
35:14
Speaker 3: breastfed children on a whole range of other dimensions. So
35:17
Speaker 3: they tend to have a better, more supportive home environment.
35:21
Speaker 3: Because breastfeeding is really tough, the mother tends to be older,
35:24
Speaker 3: be higher iq herself, be a higher income. It may
35:28
Speaker 3: well be when the mother goes back to work. If
35:31
Speaker 3: you're an executive with a pumping room and a fridge,
35:34
Speaker 3: then you can pump milk, whereas if you're working in
35:36
Speaker 3: a factory that's more difficult. So why might this be
35:39
Speaker 3: so damaging? Because if we give the message to mothers
35:42
Speaker 3: that you're a bad mother if you don't exclusively breastfeed,
35:46
Speaker 3: the skiltrit smothers into a feeding method which is very demanding.
35:50
Speaker 3: It means that fathers are not able to participate and
35:53
Speaker 3: to share the load. And it can well be that
35:56
Speaker 3: even if you use breastfeeding as the primary method, which
35:59
Speaker 3: is what my wife and I ended up with, we
36:01
Speaker 3: could still use the bottle from time to time, because
36:03
Speaker 3: the evidence suggests that after you control for peral background,
36:08
Speaker 3: there is no clear relationship anymore.
36:11
Speaker 1: I think that Listeners is going to be really grateful
36:12
Speaker 1: for that one. Now, listen to heavy. Where do you
36:14
Speaker 1: think the ESG juggernaut is going? Now?
36:18
Speaker 3: What I like is ESG to completely disappear. Now that
36:21
Speaker 3: might seem a critical radical suggestion, but I wrote a
36:24
Speaker 3: paper about a year ago called the End of ESG.
36:28
Speaker 3: And so what do I call it the end of ESG?
36:30
Speaker 3: Not because I'm a massive ESG detractor, but I highlighted
36:34
Speaker 3: two things. First, the end of ESG as a niche feel.
36:38
Speaker 3: So on the one hand, there are some people thinking
36:41
Speaker 3: that ESG should only have interest if you run an
36:44
Speaker 3: ESG fund, But if you do, I'm correct, and things
36:48
Speaker 3: like employee satisfaction or as you're suggesting there factors like
36:51
Speaker 3: governance can improve long term shelled returns. Then those are
36:56
Speaker 3: not just for ESG funds, that's for any fund. So
36:59
Speaker 3: I think that the esp label has unfortunately made it
37:02
Speaker 3: quite niche. And some of the culture wars that I
37:04
Speaker 3: see in the US, they're a bit surprising to me
37:07
Speaker 3: because why do some Republicans want to ban consideration of
37:11
Speaker 3: ESV factors when some of these factors might and deep
37:14
Speaker 3: financial material. The second part to the end of ESG
37:18
Speaker 3: is the end of it as something which has special treatment.
37:22
Speaker 3: Often it's put on a pedestal compared to any other
37:25
Speaker 3: driver of their performance. So if a fund was to
37:30
Speaker 3: invest in some companies with poor ESG credentials, they might
37:34
Speaker 3: get canceled in the media, whereas have they invested in
37:38
Speaker 3: companies with a poor strategy or poor capital allocation. They
37:41
Speaker 3: might not get the same pushback as you suggest. ESG
37:45
Speaker 3: has become this magic word when it's not really clear
37:48
Speaker 3: why they all belong together. The governance is something which
37:53
Speaker 3: is beneficial for shareholders, the NS that's beneficial for wider society,
37:58
Speaker 3: and they may conflict with each other because if you
38:01
Speaker 3: close down a polluting plant, that's good for the environment
38:04
Speaker 3: and it's bad for workers. So I don't even know
38:06
Speaker 3: why ESG came up as a term to begin with.
38:11
Speaker 3: We don't have a term for PIC, which is productivity,
38:15
Speaker 3: innovation and culture. Just any investor knows that productivity, innovation,
38:21
Speaker 3: and culture are good things to look at when investing
38:23
Speaker 3: in a company. Any board knows that they also need
38:26
Speaker 3: to assess these factors. And so this is why I
38:29
Speaker 3: want ESG to disappear as a term, so that investors
38:34
Speaker 3: and bores just view it as part of managing or
38:37
Speaker 3: investing in a company important to consider these factors rather
38:42
Speaker 3: than being really special that they should get more priority
38:45
Speaker 3: over everything else, or they should be dismissed as only
38:47
Speaker 3: being relevant for ESG types of people.
38:50
Speaker 1: I wonder if I could just ask you to give
38:51
Speaker 1: our listeners a couple of top tips on how to
38:54
Speaker 1: think better? What are the things to look at? And
38:56
Speaker 1: one of the things that I took away from The
38:59
Speaker 1: Bitter and Thinking Smarter is that if you're looking at
39:02
Speaker 1: a study in a newspaper, for example, and thinking, oh,
39:05
Speaker 1: that sounds good, thinking to yourself, would that newspaper, with
39:08
Speaker 1: its own biases have published the opposite opinion if that
39:12
Speaker 1: had come out. I thought that was a useful way
39:14
Speaker 1: to start looking at things.
39:15
Speaker 3: That's indeed one useful one. And I think another useful
39:18
Speaker 3: tip is if there's a result that we really like
39:21
Speaker 3: the findings of, to imagine that the study had the
39:25
Speaker 3: opposite result and think about how we try to knock
39:28
Speaker 3: it out.
39:28
Speaker 1: So why is that useful?
39:29
Speaker 3: So if you go back to the start of our conversation,
39:32
Speaker 3: we highlighted how smart people can use their intelligence, but
39:36
Speaker 3: they only use it selectively for studies they dislike. What
39:40
Speaker 3: I try to encourage is for you to activate that
39:42
Speaker 3: discernment for a study that you do like. So let's
39:45
Speaker 3: give an example. Let's assume that we saw a study
39:48
Speaker 3: finding that sustainability is linked to lower financial performance. If
39:53
Speaker 3: you're a sustainability supporter, how would you try to knock
39:56
Speaker 3: that down. You might say, how they controlled for industry?
39:59
Speaker 3: Maybe this is now a period in which energy outperformed tech?
40:03
Speaker 3: Or how long was the time series? Maybe you just
40:05
Speaker 3: looked at the start of the COVID pandemic and that's
40:08
Speaker 3: only one month. We need to look after at ten years.
40:11
Speaker 3: Now that you've highlighted some potential objections, see of those
40:15
Speaker 3: objections still apply even though the study finds the result.
40:20
Speaker 3: You do like so if a study finds that sustainability
40:22
Speaker 3: the link to higher performance, asked, did they control for industry?
40:27
Speaker 3: How long is the time period? Could this just be
40:29
Speaker 3: luck Alex?
40:30
Speaker 1: Before you go? This might not be your area, but
40:33
Speaker 1: I do ask everybody, And if you've listened to the
40:35
Speaker 1: show before, you'll know I ask everybody, So you may
40:38
Speaker 1: even be ready. You may even be ready. You're a
40:41
Speaker 1: very careful thinker. Obviously, have you looked at bitcoin? Do
40:46
Speaker 1: you own bitcoin? And if I were to give you
40:49
Speaker 1: the choice between owning bitcoin or owning gold over a
40:53
Speaker 1: decade long period, which do you think you would take?
40:56
Speaker 3: I am a big listener of the show, and you
40:58
Speaker 3: used to have bitcoin, gold and cash, and I would
41:00
Speaker 3: have always plumped for cash because cash at least understand.
41:03
Speaker 3: Unfortunately that's now being removed, so it's more tricky. But
41:06
Speaker 3: I will go for God, I'll put.
41:08
Speaker 1: It back in. I will put it back in. I
41:09
Speaker 1: took an act. It was so boring. It's just not
41:13
Speaker 1: quite interesting enough. It felt better when it had to
41:15
Speaker 1: be a very clear choice between two things, neither of
41:18
Speaker 1: which might be any good. But anyway, but let's say
41:21
Speaker 1: I haven't put cash back in. If you are, accept
41:23
Speaker 1: your answer of cash, but then take a second out answer.
41:26
Speaker 1: If I took cash out, where would you go?
41:28
Speaker 3: I gave for gold because I can see that goals
41:30
Speaker 3: does have fundamental value. You can use this as duel,
41:33
Speaker 3: for example, whereas the fundamental value of bitcoin that could
41:36
Speaker 3: indeed be zero. You might think this is the ultimate
41:39
Speaker 3: definition of a bubble, an asset whose worth is entirely
41:43
Speaker 3: what other people ascribe to it as it's worth so fundamentally,
41:46
Speaker 3: I don't see this as potentially having any value, so
41:48
Speaker 3: I would always choose gold rather than bitcoin.
41:51
Speaker 1: Okay, brilliant, thank you very much, Thanks very much having
41:54
Speaker 1: me on THEREK John, I love this one. Don't you
42:03
Speaker 1: want to just get Alex to look at absolutely every
42:05
Speaker 1: statistic you've ever believed and tell you whether it's real
42:07
Speaker 1: or not.
42:08
Speaker 2: Oh yeah, definitely. We can. We get in programmed it's
42:11
Speaker 2: like a chat GPT something like that.
42:15
Speaker 1: Or maybe what we need to do and have an
42:16
Speaker 1: alex section at the end of every podcast where we
42:19
Speaker 1: say to him, you know that research reporting to immigration
42:22
Speaker 1: was it true? Was it true? You know that research
42:24
Speaker 1: reporting to X y Z is it true? Life would
42:27
Speaker 1: be so much easier.
42:28
Speaker 2: That's a very good idea, and I think he needs
42:30
Speaker 2: the exposure.
42:34
Speaker 1: We can but ask John, we can, but ask anyway,
42:37
Speaker 1: what did you think was the most interesting bit in here? Oh?
42:40
Speaker 2: I thought it was all interesting.
42:41
Speaker 1: That wasn't supposed to be a trick question.
42:43
Speaker 2: Oh, I know. But for honest the bit that caught
42:45
Speaker 2: my eye was the same bit that I think caught you,
42:47
Speaker 2: which was a bit of boot breastfeeding. And I think
42:50
Speaker 2: that from a public service point of view, as parents
42:55
Speaker 2: of growing up ish kids, I think it is what
42:58
Speaker 2: has just I'm on that point home. See, if you're
43:01
Speaker 2: a new parent, or you're about to be a new parent,
43:03
Speaker 2: don't panic about the dress feeding. It is not worth
43:06
Speaker 2: sweating over. Your kids are going to be okay if
43:09
Speaker 2: they have some or even all formula milk and better, Yeah,
43:13
Speaker 2: it enables the guy you actually feed them at night,
43:16
Speaker 2: so you know, don't be bullied by the NHS.
43:20
Speaker 1: I have to point out to you, John, as I
43:22
Speaker 1: did to Alex, this is not a cool topic for
43:24
Speaker 1: this podcast. It's not.
43:26
Speaker 2: But honestly, it's just really important and at least something
43:28
Speaker 2: tears are going to be in that possession. So I
43:31
Speaker 2: just want them to know, don't sweat it, and they
43:32
Speaker 2: will know we can shut up about it.
43:35
Speaker 1: And as I say, I God, I wish i'd known.
43:38
Speaker 1: But when I when I said to Alex, are there
43:40
Speaker 1: any great untruths being told out there at the moment
43:43
Speaker 1: that we should know about? I was I was expecting
43:46
Speaker 1: him to come up with something, you know, massive and financial,
43:50
Speaker 1: something about inflation, or something about the way we calculate GDP,
43:54
Speaker 1: or something about you know, how it isn't true that
43:57
Speaker 1: passive outperforms active right, something like that, and then Durney
44:00
Speaker 1: out of the blue comes breastfeeding. Well, I see feels
44:03
Speaker 1: it's a hell of a lot more useful.
44:05
Speaker 2: I think though. The key things that illustrates his point
44:10
Speaker 2: there's if people want to believe something, then they will
44:15
Speaker 2: project so much meaning onto very tenuous data and then,
44:20
Speaker 2: as he said, the flip side is completely true as well.
44:23
Speaker 2: It's like you will pick apart even a resoundingly scientific
44:27
Speaker 2: study if it doesn't show what you wanted to show.
44:31
Speaker 2: And I think the one tricky thing is certainly from
44:37
Speaker 2: a big picture point of view, and you know, the
44:40
Speaker 2: wider world. I don't know how you actually get over that,
44:42
Speaker 2: because most of the time these things have been driven
44:46
Speaker 2: both by well a combination by emotion and kind of
44:49
Speaker 2: sunk costs where people have believed something for so long
44:52
Speaker 2: they're not willing to change their mind. And then there's
44:54
Speaker 2: usually a hardcore of bad actors with Mael incentives who
44:59
Speaker 2: are constantly pushing the more extreme case of whatever it
45:05
Speaker 2: is that it's not true or possibly not true. So
45:10
Speaker 2: I think the only takeaway from that is look at
45:13
Speaker 2: the incentives, like why am I being told this? And
45:16
Speaker 2: why am I being told this now? Is a more
45:18
Speaker 2: useful thing you ask yourself about basically any study than
45:23
Speaker 2: to necessarily be trying to then delve in and interrogate
45:28
Speaker 2: exactly you know, whether the correlation coeffesient is significant or not.
45:35
Speaker 1: Yeah, I mean, I am the thing that I think
45:38
Speaker 1: I found most genters when I was reading the book,
45:39
Speaker 1: and then when I asked Alex about it, was this
45:42
Speaker 1: idea that more knowledge doesn't help, because certainly, I think
45:45
Speaker 1: most of us believe we know we have biases, right,
45:48
Speaker 1: we know we do, but I think we believe. But
45:51
Speaker 1: if we learn more about a subject, if we try
45:53
Speaker 1: and understand things better, if we listen to other people speaking,
45:56
Speaker 1: if we, as they say on the internet these days,
45:58
Speaker 1: educate ourselves, will become less biased, well understand what, will
46:02
Speaker 1: be better people, and will be able to have a
46:05
Speaker 1: more nuanced view of things. And Alex's exformation of why
46:10
Speaker 1: that is not the case, and how in fact, the
46:13
Speaker 1: more you know about something, the more biased you can become,
46:15
Speaker 1: because the easier it is for you to pick hold
46:17
Speaker 1: on the other side of arguments. Now that I found
46:20
Speaker 1: genuinely frightening.
46:21
Speaker 2: Yeah, I think it's very obvious as well, because if
46:24
Speaker 2: you look at any contentious issue, the smarter of the
46:26
Speaker 2: person put in the opposite case, the more arrogant they
46:30
Speaker 2: tend to be. And often the problem is that gets
46:33
Speaker 2: that rubs up the people on the other side of
46:35
Speaker 2: the argument the wrong way, and hence you get extra polarization.
46:41
Speaker 2: I think often intelligent people don't actually communicate very well
46:46
Speaker 2: the points of view because that high deeds kind of arrogance.
46:52
Speaker 2: But from an investment point of view, it kind of
46:54
Speaker 2: drag it back to to that. No, I don't, given
47:00
Speaker 2: that we know that we get biases. I mean, how
47:03
Speaker 2: do you count a dual confirmation bias when it comes
47:08
Speaker 2: to working investment?
47:09
Speaker 1: I know, I just stick with them. I don't. I mean,
47:13
Speaker 1: it doesn't, I just stick with being wrong. No, I
47:17
Speaker 1: mean it is a really interesting one because our job
47:19
Speaker 1: is to try and look at these things in as
47:20
Speaker 1: neutral way as possible. And you know, I know, for example,
47:24
Speaker 1: I know that I am biased towards gold as inflation
47:28
Speaker 1: protector over for example, bitcoind or anything else. And I
47:31
Speaker 1: know that I have a legacy need to believe in
47:35
Speaker 1: active fund management, and that you know, I know that
47:37
Speaker 1: I have a legacy need to believe that the cost
47:41
Speaker 1: of a financial instrument is the most important important thing
47:44
Speaker 1: about that instrument, and a few things like this. You know,
47:47
Speaker 1: I know that I have these biases.
47:50
Speaker 2: What do you mean by a legacy need adventures?
47:54
Speaker 1: I suppose because I started my career as as a scholar,
47:58
Speaker 1: I guess working working in that that business, picking socks,
48:03
Speaker 1: telling fund managers, which socks that you should buy to
48:05
Speaker 1: help them outperform, etc. You know, that's where that's where
48:08
Speaker 1: my financial market training comes from. That environment, and so
48:13
Speaker 1: I think everyone who's ever worked in the active side
48:16
Speaker 1: of the business, pretty much before passive even existed. You know,
48:20
Speaker 1: you want to believe that what you did was worthwhile, right,
48:23
Speaker 1: you want to believe that. And you want to believe
48:25
Speaker 1: as well. I want to believe that all these incredibly intelligent,
48:30
Speaker 1: intellectually exciting people that I speak to in the fund
48:33
Speaker 1: management industry, I want to believe they add value I do,
48:37
Speaker 1: And I'm writing a column at the moment that almost
48:39
Speaker 1: diffinity definitively proves it. In the main thing, they don't.
48:42
Speaker 1: I mean, I don't know if you saw the private
48:45
Speaker 1: Investor Index that was out earlier this week, which tracks
48:48
Speaker 1: the performance of the individual investors an interactive investor, and
48:51
Speaker 1: you know, just imagine this is what I'm writing at
48:54
Speaker 1: the moment. Just imagine that you're a fund manager, right,
48:56
Speaker 1: You've been doing this for twenty years maybe more, really
49:00
Speaker 1: good at it. You think you're good at it. You've
49:02
Speaker 1: done thousands of company meetings, You've spoken to thousands of brokers,
49:05
Speaker 1: maybe you've even got a CFA, right, that's three hundred
49:07
Speaker 1: hours of study per level with a forty percent passer rate.
49:12
Speaker 1: Maybe you did all this stuff and guess what just happened.
49:15
Speaker 1: You've got outperformed by a twenty four year old on
49:17
Speaker 1: a retail platform who doesn't know what a pe is.
49:20
Speaker 2: How's it feel?
49:22
Speaker 1: I don't want that to happen to all those nice,
49:24
Speaker 1: clever people I know in the fund management industry anyway.
49:27
Speaker 1: So you have these biases, but you know, it's our job,
49:29
Speaker 1: and I think you do it well, and I hope
49:31
Speaker 1: I do it reasonably well to recognize what it is
49:34
Speaker 1: that you want to believe and try and make sure
49:37
Speaker 1: that you don't let that effect the way that you work.
49:39
Speaker 1: But it is not easy.
49:41
Speaker 2: Yeah, it's not easy. I think that. I think from
49:47
Speaker 2: a practical point of view. The one thing that maybe
49:50
Speaker 2: I've laned is if you find like a trusted or
49:57
Speaker 2: a broadly trusted source. And this comes back to our
50:00
Speaker 2: is talking about then, like for example, the Office for
50:02
Speaker 2: National Statistics. It's like in the old days before the
50:06
Speaker 2: two thousand and eight crisis particularly and in the immediate
50:09
Speaker 2: mathter math of it. You know, if a bit of
50:13
Speaker 2: data from the NS didn't confirm my biases. I was
50:15
Speaker 2: always looking into the guts it to see if I
50:18
Speaker 2: could find a reason why it was wrong. And the
50:21
Speaker 2: thing is, you know, of all the data you get
50:24
Speaker 2: in the UK, this stuff has been around for a
50:26
Speaker 2: very long time. They do mess a boot with it,
50:29
Speaker 2: and they do kind of you know, change the series
50:31
Speaker 2: and things like that. But broadly speaking, this about as
50:34
Speaker 2: neutral as you're going to get. So if it's been
50:37
Speaker 2: going against you for the last six months, say, or
50:41
Speaker 2: the last.
50:41
Speaker 1: Three, maybe you're wrong.
50:42
Speaker 2: Yeah, maybe you're wrong, and maybe you should start taking
50:45
Speaker 2: it it face value.
50:46
Speaker 1: Alex actually changed my opinion on something, not just not
50:51
Speaker 1: just done discussion me hair on the podcast. But then
50:53
Speaker 1: then when I read some of his papers, and I
50:55
Speaker 1: read some of the papers he's referred to referred to
50:58
Speaker 1: in one of his papers on c right. So I've
51:01
Speaker 1: long held the belief that most CEOs are grotesquely overpaid,
51:06
Speaker 1: be it in the UK or in the US, and
51:07
Speaker 1: obviously very much more so in the US and in
51:10
Speaker 1: the UK, And I constantly say things like, you know,
51:14
Speaker 1: why should anyone be paid enoughter it transform the fortunes
51:17
Speaker 1: of their families for generations to come for running a
51:19
Speaker 1: company that they didn't even set up when they're not
51:22
Speaker 1: an entrepreneur. You know, a couple of million quid is
51:24
Speaker 1: enough enough already, and I've long believed that to be
51:28
Speaker 1: the case, and Alex managed to make me look at
51:33
Speaker 1: it from a different perspective that this isn't about lifestyles.
51:38
Speaker 1: That CEOs don't want more money because they want extra
51:41
Speaker 1: private jets, although they probably do. Everyone wants to be
51:43
Speaker 1: the double PJ Gerry, but it's not really about that.
51:47
Speaker 1: It's about feeling that they're treated fairly. And if the
51:51
Speaker 1: guy in America is getting fifteen million bucks and they're
51:54
Speaker 1: only getting to they feel like it's not fair. And
51:57
Speaker 1: someone who feels that they're being treated unfairly doesn't always
52:00
Speaker 1: perform in the way that somebody else does. And I
52:03
Speaker 1: actually thought, well, you know, that's kind of a compelling argument.
52:07
Speaker 1: And it's also true that in the great scheme of
52:09
Speaker 1: a couple of million quid here or there for most
52:12
Speaker 1: big companies is nothing. So Maren, let it go. And
52:17
Speaker 1: that's a massive change of opinion for me. So you know,
52:22
Speaker 1: maybe I'm not a lost cause. John.
52:26
Speaker 2: I mean, that is a massive change opinion for you.
52:28
Speaker 2: I mean you're late, and I was not surprised exactly,
52:32
Speaker 2: but yeah, your recent call them about it, I thought, oh,
52:35
Speaker 2: Man's UN's mailed and that's why.
52:39
Speaker 1: Oh maybe she's just not as close minded as you thought.
52:43
Speaker 2: Maybe maybe.
52:45
Speaker 1: Okay, here's the challenge. Readers, listeners, those of you who've
52:50
Speaker 1: been reading and listening to John and me for the
52:52
Speaker 1: last decade decade plus, you know what our bias is it?
52:56
Speaker 1: Right in change our minds. Thanks for listening to this
53:02
Speaker 1: week's Maren Talks Money. We will be back next week.
53:05
Speaker 1: In the meantime, if you like our show, rate review
53:07
Speaker 1: and subscribe wherever you listen to your podcasts, and keep
53:09
Speaker 1: sending your questions your comments to Merrorn Money at Bloomberg
53:13
Speaker 1: dot net. And as an extra challenge this week, those
53:15
Speaker 1: emails that I want you to send to change our
53:17
Speaker 1: minds about things that you know we are biased about.
53:19
Speaker 1: This episode was hosted by Me Maren zumset Web. It
53:22
Speaker 1: was produced by Someasadi, additional editing by Blake Maples. Special
53:26
Speaker 1: thanks to Alex Edmonds and John Steppick. I'm back to
53:29
Speaker 1: changing our minds. Please, please don't make all the emails
53:31
Speaker 1: about bitcoin. Please sum about something else. Thank you,