Prophets with No Skin in the Game

When one practices idle fortunetelling in private that fails to materialize, very little harm might be done. On the other hand, when one holds oneself out as a public intellectual and issues prognostications with a bombastic air of authority, and others make investment and career decisions based on those claims, the potential for harm is great. After all, if one did not expect others to heed one’s advice, then there would be no point in volunteering it in the first place!

Consider that one could have bought a whole unit of Bitcoin for about $13.50 in January 2013. If one had been about to roll the dice then and buy 100 bitcoins at that price, but decided against it based on some recent apocalyptic scribblings by Paul Krugman, or the guffaws of some gadfly on television, then one would have missed out on a gain of more than 40x—from $1,350 to $60,000+—over the course of the following year, and this in spite of a system-threatening hard fork and two ‘crashes’ during that period!

Now, was there any guarantee of such a gain at the beginning of the 2013? Of course not! In the long run, all risk-adjusted returns are equal—again, because of the No Arbitrage Assumption—and the fantastic returns reflected the mind-cracking risk. And, one who had implied that the price of Bitcoin definitely would skyrocket should have been held as accountable for such pecuniomancy as we hold any other huckster.

Those who convince others that they can divine the future should bear the full cost when their clairvoyance fails, and they do risk fines and imprisonment when promising positive outcomes. The problem is that while the promoters of dodgy investment schemes violate financial statutes and regulations, naysayers can trash-talk potentially viable opportunities with impunity.

No one who has sneered at Bitcoin and declared it to be a Ponzi scheme and worse, risks hearing an ominous regulatory knock on the door, in spite of having scared countless speculators away from potentially lucrative investments. However, woe betide anyone who convinced friends, family, and especially strangers to buy Bitcoins at $1,000 at the end of 2013, only to see the value plunge by more than half before rising to the $600s in mid-2014. In both cases, one’s advice would have cost others dearly, if they followed it, but only the positive adviser bears any personal risk, even though the naysayer is equally culpable.

In an ideal world, those who have nothing to lose should their pontification prove to be woefully inaccurate would be ignored, if not openly mocked. This, unfortunately, is not the case, and appeals to authority, popular sentiment, and tradition rarely inspire the kinds of public derision that all logical fallacies passed off as analysis should inspire.

It is one thing to hold an opinion, no matter how ill-informed, because we cannot be experts in all things, and each of us must make potentially life-changing decisions almost daily. If one’s guess is correct, then one gains; and, if one’s guess is incorrect, then one loses. The goal is to be right more often than wrong.

It is another thing entirely to treat an opinion as fact, personal taste as a universal moral principle or law of nature, or a hypothesis as a foregone conclusion.

And, it is something bordering on sinister to offer opinions and hypotheses as self-evident truths that others ignore at their own peril, especially if the opinionsmith holds a position of some authority.

If one does not have any skin in the game, it’s just economics.

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