Green shoots but doesn't score.....

Hi,

Originally credited to Norman Lamont in a 1991 recession era speech at the Conservative Party conference, the phrase "green shoots" has been popping up everywhere recently. It even has it's own entry in the Cambridge Online Dictionary:

"Green Shoots - plural noun. (Used especially in newspapers) the firstsigns of an improvement in an economy that is performing badly."

From Baroness Vadera (who probably wishes she hadn't) to Ben Bernanke, from bank research articles to every newspaper whether pink or red topped (although the latter may have been referring to England's latest goalkeeper). However, as the burning sun torches the greenery in my garden so the "green shoots" appear to be withering. But rather than ask whether there ever were any green shoots, the more interesting question is how does the use of language and data affect our behaviour?

Social psychologists such as Kahneman, Slovic and Tversky (1) have studied how we make judgements under conditions of uncertainty. If you ask someone how likely it is that an elephant will fall out of the sky and land on their head they will tell you that the probability is (virtually) zero. Ask them again just after a five tonne African bull elephant has given them a fine centre parting (assuming they survive) and the their answer will be very different. Lotteries don't emphasise the fact that the odds of winning are tiny - they highlight the size of the payouts of recent winners.

These are just two examples of the so called "availability error" - the process of determining probability by the first thing that comes to mind. The "anchoring heuristic" describes how we determine the frequency, probability, or value of items by comparing the item to an anchor point. It appears to be relatively easy to influence the actions of individuals simply by generating numbers regardless of whether they have any relation to reality. Make the number dramatic enough and people will sit up and take notice. By the time people realise how baseless the original assertion was it's too late - it now has momentum. Ask someone (who doesn't actually know) to estimate the population of the Maldives and preface the question by asking whether it is more or less than one million. The actual number is much less but the average guess will be around this figure - the anchor point. Financial numbers can be manipulated in the same way. Unrealistic price targets, growth forecasts, etc, can easily become anchors. If the true figure turns out to be very different the market reaction can be severe even thoughthe original forecast should simply have been discounted more heavily.The problems caused by the "anchoring heuristic" can be exacerbated by the "confirmation bias". This is a tendency to find data that supports an hypothesis and ignore data that rejects it.

If you believe that a particular stock rises on a certain phase of the moon you'll make note of the rises when this phase occurs and ignore rises at other times. Doing this frequently reinforces the belief in this relationship.

These heuristics exist because they save us time. Why bother doing the research when a simple rule-of-thumb will suffice? However, failing to acknowledge their clear weaknesses can easily lead to irrational investment decisions. When someone starts talking of "green shoots" or any other phrase du jour look before you leap. Question their motivation and check to see if the supporting data stacks up. As the old saying goes, invest in haste and repent at leisure.

(1) Kahneman, D. Slovic, P and Tverskty, A. eds. (1982) "Judgement Under Uncertainty, Huristics and Biases", CUP.

Dr Mark Tomsett