The Worst Form of Government…

…except for all the others, is the famous quotation from Winston Churchill.

How does democracy work so well, when people have so little factual information about their government?  It is natural for people to economize in reading and to emphasize that which is entertaining.  Sociologists and political scientists long ago discovered the mechanism for effective democracy, something called the two-step flow of communications.  The basic idea is that there are always some people who study issues and candidates carefully, spending the time to collect the facts.  Many voters take a cue from those with similar interests and ideology.  Once they have found an informed friend who shares their basic values and opinions, they can cut down on the needed work and still vote effectively.  In recent years this process has become complicated by TV advertising, but we’ll save that topic for another day.

Since investors have as little information available on a topic that is just as complicated, is there a similar mechanism for them?

The sad answer is, "Probably not."  Everyone is selling something.  Moreover, there is an unwritten rule that prevents criticism or peer review of research.  The so called "Bull-Bear" debates on CNBC show good intentions, but they do not provide the basis for real analysis.  The average viewer is likely to be more influenced by who was more polished on camera.

In particular, most viewers do not know how to evaluate quantitative research.

Is it worse to waste your vote or to lose your money?