Tribal Reality and Extant Reality

(This is adapted from a rather silly speech I like to give to my finance classes when the slide projector breaks. Warning: includes blatant exaggerations and shoddy pop history.)

How do we know something? Two ways. Either we find out for ourselves, or somebody tells us. For example, I can discover that there's a table in the middle of the room by stubbing my toe on it, or by someone saying "Hey watch out, there's a table there."

Why would we rely on second-hand information instead of first-hand information? Time and effort, for one thing. It's usually easier to ask people stuff - or check Google, or Wikipedia, or a book - than to go find out yourself. This is especially true of things like the mass of Jupiter, which is very hard for a person to measure entirely on their own.

Now, since we rely so much on getting info from others, it's only natural that humans have evolved a form of communication that seems like it's delivering information, but is actually not. It's called "bullshit". Bullshit is defined as "stuff that people say without regard to whether it's true or not" (see Harry Frankfurt's essay on the subject). Bullshit can be fun, as when you sit around and bullshit with your friends. Bullshit can be useful, and in fact underlies many of our industries. And bullshit can be harmful, when people mistake it for real, useful information. ("Bullshit" can also be applied to human-made institutions or procedures that don't accomplish their ostensible purpose.)

But there's one kind of bullshit that I want to discuss today. It's what I call "Tribal Reality". People want to belong to tribes, so they have to have some way of signaling "Hey, I'm in your tribe, buddy!" Sometimes they wear similar clothes. Sometimes they have similar accents. And sometimes they say similar bullshit. For example, in America, conservatives signify their membership in the Conservative Tribe by saying things like "Evolution isn't true."

Do American conservatives really believe evolution isn't true? That's kind of a philosophical question. I'm sure they feel an emotional upwelling of "rightness" when they say "Evolution isn't true". But if they had to bet on it - if someone with conclusive data asked them "Is evolution true, yes or no?", and if they got the answer wrong a giant hammer would swing down and crush their heads - I think they'd answer that it is true. Research shows that when you pay people to get answers right, their tribal belief gaps mostly disappear. 

But it really doesn't matter. Conservatives don't say "Evolution isn't true" in order to convey real, useful information. Whether evolution is true, or whether there was a Big Bang, or whether the Earth is balanced on a giant stack of turtles, doesn't really affect their lives one way or the other. But membership in a group really does affect their lives, and so they repeat bullshit like "Evolution isn't true" back and forth to each other because it binds them together to do so. It's the same reason Japanese rightists deny the Japanese army's WW2-era sex slavery, or conspiracy theorists used to talk about "black helicopters". 

Now, I'm not saying that Tribal Reality is bad, just because it's bullshit. It's a very powerful technology. After all, closer-knit tribes tend to more willing to provide public goods. So tribe-forming technologies, including Tribal Reality bullshit, can be incredibly good for human welfare. Or, of course, they can be bad, causing things like wars. 

I've noticed an interesting thing about bullshit: There's no word for it in Japanese. Just as some Japanese words (like 適当) can't be translated without a long and complicated explanation, a proper understanding of "bullshit" typically occupies an entire dinner party in Japan. Observing this fact, I came up with my theory of what makes (or made) Western Civilization unique. 

Tribal Reality and Western Civilization

Back in the days of low technology, one person's observation was just about as powerful as another's. If there's a table in the room, any non-blind person can see it. Without technology, everything is like that. So in a low-tech society, while you have to worry that people might be lying to you, you don't have to worry that someone else can see something important that you can't. Get enough people in the room, and the majority will always be right. In other words, in a low tech society, Consensus Reality (which occasionally is Tribal Reality) is as good as you're ever going to get.

Of course, in low-tech societies, there were always a few people who insisted that they could see a reality that others couldn't see. These people often became cult leaders, and the successful ones became prophets of new religions. But these new religions brought war and social upheaval, so traditional societies put mechanisms in place to stamp these dangerous people out. Cult leaders were burned as heretics. It was the sensible thing to do.

But then something changed: Technology reached the point where one person, wielding superior tech and possessing the specialized knowledge to use it, could uncover useful information that had the power to really affect people's lives. With his telescope and astronomical data, Galileo could learn that the Earth really did go around the Sun. With his chemistry equipment and microscope and epidemiological data, Pasteur could learn that tiny invisible microbes caused infectious diseases. If a million people disagreed with Galileo or Pasteur, the million would be wrong, and the one would be right.

This was the first time in human history that this had ever happened.

At first, Western society reacted the way any sensible low-tech society would - by punishing the people who claimed to have some special knowledge. But as it became clear that This Time Really Was Different, Western civilization grew to embrace the iconoclast. The lone inventor, the brave whistleblower, the brilliant scientist, the skeptic - these are some of our greatest heroes. "Think different", our billboards tell us. "If all your friends jumped off a bridge, would you jump off a bridge too?" is a question we ask our kids, and we teach them to say "No!" (even though if you think about it, the sensible answer is probably "Yes"). 

Western civilization got a head start in science, so much of the scientific knowledge now enjoyed in other countries was discovered in the West. Science is powered by iconoclasts, doubters, and skeptics, so Western civilization had to learn to love doubt, iconoclasm, and skepticism. And it paid off - the scientists of the West delivered technologies that temporarily made Western countries the most powerful in the world.

This is not to say that Western civilization got rid of Tribal Reality. We still have a ton of it. Nor is it to say that we expunged bullshit; we still have huge amounts, much of it incredibly useful. But what Western civilization did, I think, is to be the first to perceive the existence of bullshit. Only when you emerge up from the ocean into the air can you perceive the ocean. Western civilization, emerging from the warm, comforting ocean of bullshit, perceived that it had been swimming in bullshit all along.

What Western civilization had done is to discover a kind of reality that was beyond Tribal Reality, and was beyond even the more general phenomenon of Consensus Reality. They discovered Extant Reality, the reality that hits you in the head even if you and everyone you know fails to believe in it. Extant Reality is a pitiless, cold, frightening thing. It's a monster from an H.P. Lovecraft story. It is not something you would choose to have exist, but that's the point - you don't get to choose. Western civilization, by being the first to get past that technological critical point, was the first to be forced to reconcile itself to the inability of Tribal Reality to stave off Extant Reality. So the West was the first to begin the hard, painstaking, uncertain task of bending Extant Reality to the will of humankind.

And that was Western Civilization's "secret sauce". It would be a pity to abandon it.

Reality and Financial Markets

But let's get to another point: How to make money. In financial markets, the Western fetish for iconoclasm can run into problems. This is because of the "Wisdom of Crowds". Financial markets often do a good job of aggregating the diverse information of a large group of people. When information is aggregated, the average guess of the group becomes more accurate than the individual guess of any one person in the group. You can see an example of this if you take the average of people's guesses of how many jellybeans are in a jar - the average will usually beat all, or all but a couple, of the individual guesses. This is the Wisdom of Crowds at work.

The Wisdom of Crowds is present in financial markets. It is possible to outguess the crowd, but not easily, and not all the time. And whenever you do outguess the crowd, it will be costly to do so. This is just the "Efficient Market Hypothesis", which is actually a general idea rather than a formal hypothesis. It basically says that in financial markets, Consensus Reality is generally as good as you're going to get. This means that you shouldn't spend too much time and effort trying to be Pasteur or Galileo; if you do, it won't be worth the cost, and if you try, you're just going to end up being a sucker for a hedge fund with a more powerful telescope...er, supercomputer. Behavioral finance says that people' overconfidence will make them too willing to believe that they've uncovered some hitherto unexplored corner off Extant Reality, when they really haven't.

Some people disagree with the EMH, of course. Proponents of fundamental analysis think that lots of people can be iconoclastic Galileos and Pasteurs, by careful, rational examination of companies. Of course if everyone does this, the return to doing it will drop, but maybe there is room for a reasonably large number of Galileos. Maybe there is a lot of information out there to uncover, and maybe a lot of people can simultaneously reap rewards for uncovering it.

But there's also another idea, which is also part of behavioral finance, and which I see slowly gaining traction. This is the idea that occasionally, the Wisdom of Crowds breaks down catastrophically. Once in a great while, Consensus Reality gets tricked by Tribal Reality. When Tribal Reality takes over, people repeat bullshit "stories" to each other, until they actually become willing to bet on them. Those bets push up prices, which lends the bullshit narrative credence, making more people join the "noise trader" herd, and it snowballs into a gigantic bubble.

Now, it's an open question as to whether you can make money shorting a bubble. Sometimes you think you see a bubble but it's not really one at all. Sometimes you can see it, but it might be wiser to ride it for a while instead of shorting. And the decision to ride it, short it, or stay on the sidelines generally carries lots of risk. So I'm not saying "Go find some bubbles and short them".

But what you can do is this: When you invest, avoid Tribal Reality like the plague. Do not believe in bullshit "stories" and "narratives". Do not listen to people's financial advice just because they are the same race or religion or political ideology as you. Do not buy into fads or fashions. In other words, no matter how warm and fuzzy Tribal Reality makes you feel, when it comes to your hard-earned cash, don't bet on bullshit.

That sounds like an easy thing to do, but it's not.