Tuesday, August 8, 2023
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The perils of “trusting armchair economists”

With the rise of social media platforms and the accessibility of information, it’s easier than ever to come across people who present themselves as experts in the financial services industry.

However, Fabs Aria (pictured above), financial specialist and BDM at Greenlight Auto Finance, warns against placing blind trust in these “self-proclaimed gurus”, shedding light on the pitfalls of following their advice.

“Beware the armchair economists,” said Aria, who himself is studying a Master of Economics degree at the University of New England.   

“Statistics such as economic trends and forecasts are often sensationalised by the media or the economists themselves and will leave you missing out on the opportunities around you.”

The fallacy of anecdotal evidence

The first thing to look out for, according to Aria, is the fallacy of anecdotal evidence. This occurs when someone draws a general conclusion or makes a broad statement based solely on a few individual examples or isolated incidents.

“I find that a lot of people use their own personal success and anecdotes to give advice to people,” said Aria.  “They’ll say, I have 10 properties, so therefore if you do exactly what I did – 5am wake ups, cold showers, avocado, and all that stuff –  then you’re going to meet my success.”

Imagine a mortgage broker who claims that a particular type of mortgage product is the best option for all clients based solely on a couple of success stories they’ve experienced or heard about.

“Effective advice should be based on a comprehensive analysis of the client’s needs and the available options,” Aria said.

Conversely, mortgage brokers themselves might fall into the anecdotal evidence fallacy when seeking advice or making business decisions. For instance, a mortgage broker could attend a conference where a few colleagues share stories of how a particular marketing strategy led to a surge in their client base.

In both cases, the outcome relies on a lack of evidence and could lead to poor decision-making and missed opportunities.

Looking out for appeals to authority

Another common problem to look out for is appeals to authority, said Aria.

Imagine a bustling digital town square, where economists in sharp suits stand on virtual soapboxes, armed not with crystal balls, but with meticulously crafted charts and graphs.

Just as astrologers of old would gaze at the stars and predict your destiny, these economists peer into complex mathematical equations and financial models to prophesize on LinkedIn the rise and fall of rates and markets.

“Trust me about the future, I’m an economist,” they say.

Yet, as the latest Fool or Forecaster Report showed, even the most educated and revered economic expert can be drastically wrong.

Published in April by The Elephant in the Room Property Podcast’s Veronica Morgan and Chris Bates, the report sets out three reasons not to rely on an economist: the lack of a consistent track record, the fact that they can’t agree with each other, and that the industry forget to hold them accountable.

From various predictions that the property market would fall by 25% to economists forecasting that the cash rate won’t rise until 2023, the report chronicles multiple examples of incorrect attempts at predicting the future.

Even the Reserve Bank itself, which dictates monetary policy and therefore influences the opinions of many economists, is not safe from getting it wrong.

“I’m always so sceptical of anyone giving out advice, especially if their appeal to authority is because of their academic background, like if they have a PhD or are an expert, and not because of the data,” Aria said. 

Why economics is a flawed science

Even if the economist is not appealing to authority and is relying on the data, economic forecasting faces complexity anyway since small variable changes can lead to massively different outcomes.

In this 2017 article by The Guardian, Professor Sir Michael Berry illustrated this point by forecasting the path of a snooker ball after it was hit.

While predicting where the ball would initially go is easy, forecasting what would happen once the ball was struck for the ninth time would require one to factor in the gravitational pull of nearby people.

By the 56th impact, accounting for every particle in the universe in essential.

“Whenever I speak on LinkedIn, I always talk about more principle theoretical concepts opposed to anything too specific because I find a lot of the times these economists who are trying to predict or forecast anything, they’re pretty much no better than an astrologer.”

What can brokers trust?

With all the talk about the mistrust of experts and economists, one may wonder where can brokers can get their information.

Aria said that while it was important to take these forecasts with “a grain of salt”, don’t discount it completely.

“It’s been proven time and time again that economists can be wrong, but we need data to form our opinions of the future. Learn the economic concepts, filter in the trusted sources, and make an educated decision,” he said.

“In economics, I always believe that you need to have some humility with your forecasts because you are studying something that’s very complex.”

What do you think of economic forecasts? Comment below.



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