Confidence trick

Wisdom of the crowds

The older I get the more I appreciate the importance of confidence. Lose it and life gets very much harder - most watching Ms Truss’s faltering press conference following Mr Kwarteng’s defenestration would have concluded that she was no longer a credible leader. (Of course, there were those of us who came to that conclusion much earlier – does it count as prescience when it’s so obvious?…)

At work, I try to impress on the team the importance of being quietly confident. No-one likes someone who is too cocky, but we are reassured by someone who knows what they’re talking about and we respect them if they gently but confidently challenge our views.

My own tendency to cockiness is generally kept in check by Mrs R. She has an unerring ability to bring me back down to earth with no more than a single phrase, or even just ‘that’ look. If I feel that I am in danger of reaching a level of smugness that even Mrs R’s talents would find challenging to control, I book a visit to the opticians to buy some new glasses. These visits always follow the same format and always result in me walking out with my self-esteem several notches lower. It starts as I expect most do. She sits me down and looks straight into my eyes, although sort of through my eyes. She’s not trying to see into my soul, but has reduced me to an insentient object. ‘You’ve got a big head’ ‘thank you’, I respond, even though I realise it was a statement of fact muttered to herself and not intended to flatter. She sighs and bumbles off to the racks of frames, returning with an armful. As we try them all on, she calls over first one, then other colleagues for their opinion. After ten minutes, by which time even waiting customers have joined the throng, I’m starting to feel like a sideshow ‘Roll up! Roll up! See the man with the implausibly fat head trying on glasses that make him look like a German!’

Even without glasses, looking like a German is a burden I’ve carried for most of my adult life. It’s most apparent when we’re abroad. In Rome in 2006 on the evening of the World Cup semi-final between Italy and Germany, I’d booked a table in a small, typically Italian, restaurant – the sort with wipe clean table clothes, a television in the corner and wonderful cooking (L’Amore – if it’s still there I’d happily recommend it). We walked in, the atmosphere tightened, the waiters stopped chatting, the telly was turned off and glances were exchanged and thrown furtively in our direction. It felt a little uncomfortable.

‘Guten abend’ a waiter welcomed us, gesturing towards a table in a dingy corner. ‘non sono Tedesco, sono inglese’ I stuttered in faltering Italian ( I can also ask where the railway station is – sorry, being smug again). There was a collective sigh of relief, as if a light had been turned on – no, a hundred lights! The waiters started laughing, the ubiquitous TV was turned on and we were ushered to one of the better tables. Deep inside, I felt a slight pang of pity for my doppelgangers sitting, ostracised, in dingy corners in other small restaurants in touristy parts of Italy. The Italians won that night and the celebrations lasted well into the next morning, culminating with young lads standing on the roofs of cars waving Italian flags as they whizzed around the roundabout near our hotel – while a poor lone Carabinere tried to stop anyone killing themselves.

Of course, there are times when being mistaken for German could have its advantages. In Copenhagen we went to a small bar in the ‘French Quarter’ (basically one short street with two vaguely French themed bars and a bistro – if you don’t have to head that way, I wouldn’t make the detour). The barman greeted me in Danish. Now, I don’t mind being mistaken for a Dane – I quite like the idea of there being something of the Viking about me, even if it is just that I’ve got blue eyes and a beard.

Sorry, I don’t speak Danish

Ah – Deutsch? (obviously – should have seen that coming…)

No, sorry…

Nederlander?

No… er, English

As one, the twelve or so people in the bar stood, started laughing, pointing and chanting ‘Brexit! Brexit!’ We had literally become the laughingstock of Europe – and I hadn’t even voted for it!

(talking of Brexit, and being German… at the time of the Brexit referendum the UK economy was 90% the size of Germany’s; more recently, and before the chaos of the mini-budget, it had fallen to less than 70%. Just saying…)

In Marrakesh there was no doubting that I looked very English. As we made our way through the assault on all the senses that is the Grand Souk we were greeted with cries of ‘Good Price! – Asda Price!’ and ‘Lubbly Jubbly’ which sort of took the edge off the authentic Moroccan experience.

Which was a shame as Mrs R and I love markets; the noise, the smells, the way that everyone seems to be rushing and the thought that you might find something really special. After around 40 years we still haven’t made any exceptional finds but we have had some great days hunting. Les Puces, the vast fleamarket nestling alongside the Peripherique north of Paris is a veritable treasure trove; the bazaars in Jaipur and Jodphur are all you’d expect and more. I’m guessing Mr Kwarteng is not such a fan of markets. I never quite understood what it meant but I’m pretty sure ‘taking back control’ wasn’t supposed to look like this. Perhaps it’s as well the markets wrested control from Kamikaze Kwarteng before the economy went into a terminal dive. Markets rely on the wisdom of crowds; the observation that a large group of people will be pretty good at providing an estimate – in this case, better than the combination of Truss and Kwarteng (or just Kwarteng, if you believe Ms Truss).

The great Victorian polymath Francis Galton noted this wisdom of the crowds in a short paper, ‘vox populi’, published in Nature in 1907 (it’s online and quite interesting if, like me, you have geek tendencies). In it he describes a weight-judging competition at the West of England Fat Stock and Poultry Exhibition, held in Plymouth where nearly 800 people paid sixpence each to guess the weight of a ‘slaughtered and dressed’ ox. Galton was hoping to show the failings of the democratic process. Analysing the individual guesses he found the median response (the ‘vox populi’ or the voice of the people, his proxy for their vote) was correct to within 1% – not a bad estimate and a vindication for the democratic process (although I’m not sure what Galton would have made of the Brexit vote, let alone the current nonsense). A more contemporary example comes from ‘Who Wants to be a Millionaire’. Get stuck and ask a friend and you’ll get the right answer two thirds of the time but call on the wisdom of the crowds and ask the audience and your chances of getting a step closer to the magic million are 91%.

We use similar observations to guide our investment decisions. The price of a stock reflects the vox populi of all the market participants, some very well informed, others much less so. Their combined opinions will capture more knowledge, more data than an individual analyst could dream of. And the results back this up. Time and again, passive funds which simply follow the wisdom of the crowds outperform their sharp-suited actively-managed cousins.

Vox populi crops up in some unexpected places. Eurozone inflation is around 10% but strip out the volatile elements of energy and food and it drops to around half that figure. This is remarkably close to the pay award the man on the Brussels omnibus has accepted, as has his mate on the Clapham omnibus. Disentangling transitory inflationary effects from core price increases is no easy feat, but the vox populi appears to have achieved just that. The invasion of the Ukraine in March saw the price of many commodities rocket. As the anniversary comes around, we are likely to see a very large fall in headline inflation – it is even possible it could become negative if the oil price drops to somewhere near its pre-conflict level. We need to be on our guard for a leap in cockiness from politicians claiming credit for what is really a statistical quirk – on our guard because cockiness and hubris are closely related. Perhaps an annual visit to the opticians should be mandated for all members of the cabinet.

Richard Ross

1st October 2022