The Three Stooges and the Seven Dwarfs
A recent poll by Zogby International showed that 75% of the people can name the Three Stooges, but only 42% can name the three branches of government. 80% could accurately name two of the seven dwarfs but only 30% could name two Supreme Court justices — and Clarence Thomas was the most frequently named. There is more fun: Harry Potter or Tony Blair, Krypton or Mercury. The inescapable result is that the people polled lacked relevant knowledge of a pretty basic sort, while possessing knowledge from television and other entertainment.
This is nothing new, of course. I used to give a basic knowledge quiz to Poli Sci 101 students. About half of them (based upon a multiple choice question) thought that the Electoral College was "a small liberal arts school in Minnesota." Many polls have shown that about half of U.S. citizens cannot name their own Congressperson.
The Zogby survey reflects all of U.S. society. The people questioned are not stupid and many of them have college degrees.
In upcoming posts we will pursue this theme a bit, since it provides a tremendous opportunity for investors. It is one that has been explored at some length in non-economic social science studies and more recently in the study of behavioral finance. Two major themes of our work here at "A Dash" are as follows:
- Investors, like voters, are poorly informed and subject to various psychological influences.
- Investment managers and pundits are subject to the same influences. Reading a book about behavioral finance does not innoculate one from the effects.
In the political world, there are mechanisms that allow us to have a great democracy despite widespread voter ignorance and apathy. In the investment world, the mechanisms that might accomplish this are seriously flawed.
In democracy, you and I cannot take advantage of a poorly informed electorate. In a poker game, poorly informed opponents make it much more attractive to play.
Trading or investing provides a similar opportunity. While investing is not gambling, the poker game is a good analogy when it comes to knowledge. You cannot profit from people not knowing who is on the Supreme Court, but you can profit when the the market does not accurately reflect information about investments.