Guest post by Vedran Vuk of Casey Research’s ‘Daily Dispatch.’.
In my article last week, I pointed out a failing of some very smart people, such as Ben Bernanke. As a result of their superior intelligence, many lack humility and delude themselves into thinking the economy can be centrally planned through a series of equations.
In response, a reader sent in the following remark:
"[It is] all a matter of one-upsmanship. You point out the failings of ‘smart’ people, thereby making yourself even smarter than they are. Just another ego conflict..."
It seems like a good point, but let me clarify why this is wrong. In my opinion, neither Bernanke nor anyone else can centrally plan the economy. I'm not making the claim that I can centrally plan it better. Well, isn't the free-market a central plan? No, it isn't.
Adherents of the free-market system assert that millions of individuals following their own plans will come up with better economic decisions than small committees in government offices. A belief in the free market necessarily requires a more humble understanding of one's own capabilities. It is a confidence in the plans of others, not one's own plans for them.
This viewpoint is the complete opposite of thinking oneself smarter than everyone else. It is admitting that one is not smarter than the entire economy.
Furthermore, most Daily Dispatch readers know my respect for the marketplace. In my opinion, we don't live in a world where profits can be picked like low-hanging fruit. Markets are fairly efficient, with intense competition. I've pointed this out in past issues (March 8th issue introduction). For every good investment idea, one must a find a reason to explain why every other highly intelligent market participant doesn't see it. The marketplace is filled with participants far more intelligent than me. Anyone who believes himself consistently smarter than the whole market is either a fool or delusional. Such beliefs are a recipe for disaster.
As one of my favorite quotes goes,
"The job of the stock market is to take the smartest people in the world and smash their faces into the pavement on a regular basis."
The fields of economics and finance necessarily require humility.
So, is there an "ego conflict" here? Well, I admit my inability to plan the lives of millions, and I'm not smarter than the whole marketplace. Furthermore, I'm probably not smarter than Bernanke, but I do have more respect for the complexity of the market and the limitations of my own capabilities. And that gives me an edge in my analysis that I think Bernanke lacks.