13 December 2009

Paul Kedrosky "Contrarianism is the New Consensus"

It rarely pays to be contrarian. For the most part trends go in the same direction for some time – that’s why they’re called “trends”.  Whether it’s real estate prices, credit card debt, Treasury issuance, or Croc sales, they can continue along implausibly for far longer than you might think, sane and right-thinking and sober-minded sort that you are.
But contrarianism can work sometimes. When? At inflection points, mostly, when the trend is exhausted and can do nothing but reverse. It can then pay immensely (c.f., John Paulson) to take the other side of a cemented consensus. The trouble is, it’s just about impossible to pick such inflection points – lots of people went short residential real estate well in advance of Paulson, only to lose oodles of money.
Given this, why is contrarianism so appealing? It is appealing – and growing immensely in popularity – because it has so much smart-guy frisson. This naive contrarianism lets you pose outside the system, meanwhile keeping good company like Warren Buffett, John Paulson, the Freakonomics fellows, and oodles of self-declared fellow travelers, most of whom almost certainly aren’t doing what they say they are.
Contrarianism also appeals to our increasingly cynical nature. It is the superficial idea that most people are wrong about everything, especially if they are in government, on TV, among the putative intelligentsia, etc.They think that? Ha, I’ll take the other side, etc.
I was reminded of all of this earlier today in reading a piece in NY Magazine about the past decade’s burgeoning business of writing contrarian books & articles. The topics were wide-ranging, of course, including everything from car seats (they don’t work!) to presidential sloth (it’s okay!) to the environment (it’s all good!), to gravity (overrated!  [ed., You made that up]), but the upshot is the same: The consensus is wrong. It is to the point that as soon as something is consensus you should start a mental countdown to the day when the inevitable contrarian take shows up.
The trouble is multifold, however. First, contrarianism mostly doesn’t work – trends last until they don’t, which is often a long time, especially in a world of tight-coupling and information cascades; and long-lasting trends crush smarty-pants contrarians like bugs the whole way. Second, the consensus is more often right than the anti-consensus consensus likes to think. Call it wisdom of crowds or whatever you want, but the consensus isn’t that dumb, most of the time.
As I am stubbornly fond of pointing out, given all the flaws in human decision-making pounced on by behavioral finance sorts, decision theorists, psychologists and the rest, you’d think we humans couldn’t cross the street successfully, or invest or raise kids, or, say, wander along as a species steadily getting healthier and wealthier for a few thousand years or so. And yet, here we are. Easy and naive contrarianism about everything has become the new consensus – and that is a kind of bigoted and dumb consensus around which I’m happy to go the other way.


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