Media reports are currently full of dire predictions about the Chinese and world economies. I have read reports from otherwise credible financial industry insiders saying we should sell all our stocks, that oil prices will plummet to $10 a barrel and that the world economy will enter a deflationary spiral. Pretty scary stuff.
But, should we be scared? This is not the first time financial insiders have made extreme predictions. I remember being concerned in 2007 when the same characters predicted the Dow would go to 20,000 and oil would jump to $500 a barrel. And, being even more concerned a year later when predictions were made of a 4,000 Dow and a hyper inflationary debt spiral. Yet none of those things turned out to be true.
We tend to blame these market predictions on irrationality. However, I think the cause is more subtle and illustrative of a larger social issue.
The financial industry is based on information so that insight into a future occurrence can be extremely valuable. That’s why our markets are regulated — to prevent insiders from trading stocks when they know something the market doesn’t. For an investor, knowing something ahead of time is the most valuable information of all.
There is a vast market opportunity for people who can reliably predict market occurrences. This reality however also creates enormous pressure to make extreme predictions during times of uncertainty. Simply put, it’s business development marketing. Or, as I like to describe it, “reputational prospecting.”
Reputational prospecting means making an extreme prediction to stand out from the crowd — knowing that if the prediction turns out to be true, it will be remembered. By being right, the predictor demonstrates an ability to see something others did not and subsequent reputational benefit as a “reliable” predictor of future events. Consider how many times you have read of someone in the financial services industry, and the tagline used by the media is “Mr. X predicted the 2008 mortgage crisis” or “Ms. X predicted the collapse of the Internet bubble.” Being correct about something big can make a career. Reputational prospecting can be a very rewarding behavior.
Of course, making extreme predictions and being wrong is not an effective business development strategy in the long run. Over time, the financial market ignores people who are wrong. This has generally been because the market’s desire for information doesn’t just include who has been right, but also who has not. The first time you see the tagline on Bloomberg for an expert being “Mr. X is consistently wrong about everything” please let me know.
While the financial markets are more accustomed to reputational prospecting and have developed mechanisms to filter it, the broader world of web and social media has not. This is what makes the current coverage of the world markets particularly illustrative – much of the breathless doomsday information we are hearing of this week is being shown to us through our online channels.
It is becoming more and more apparent that social media has created an ever-growing amount of information, and in a world of information overload two behaviors become more commonplace: people get numb to new information and they look for ways to filter information flow. These are ripe conditions for reputational prospecting. Unlike financial markets where participants have developed mechanisms for addressing and filtering this behavior, the web has not.
It has struck me last week that perhaps much of what explains our current political campaign discourse is this phenomenon. I will admit that when I hear of extreme viewpoints I largely discount them as I look at long-term trends and fundamentals. I approach political information the way I have always approached financial market information. But not all voters have that reaction. Many are hungry to hear someone rally around their personal fears.
Have we have entered a political campaign where our candidates are engaging in reputational prospecting? Let’s see. If their predictions are unfounded, reactionary and designed to whip people into a frenzy, then I would have to agree.
I hope we will develop mechanisms to appreciate the basis of this behavior and discount it. The best investors have learned to look past reputational prospecting to find a baseline of information that has value in the longer term. Let’s hope our citizens will do the same this election season.
Jonathan Aberman is a business owner, entrepreneur and founder of Tandem NSI, an Arlington-based organization that seeks to connect innovators to government agencies. He is co-host of “Forward Thinking Radio” on SiriusXM, a business and policy program, and lectures at the University of Maryland’s Robert H. Smith School of Business.