Investors vs. Economists
Recently we’ve witnessed how traditional economic models have not had expected results during the pandemic, just like they did not in the 2008 Global Financial Crisis. The reasoning this time is that “we have had a demand shock simultaneously with a supply shock, and normally models deals with one at a time”. Fair enough the pandemic is new, but when we go back in history economies have failed and recovered with the adaptation of tools that reflect the demographics and psychographics of those times.
Therefore, understanding the mindset, perspective and decision making process of the people living in this modern economy could go a long way than simply implementing traditional economic tools. We must acknowledge that while almost everyone expects the future to be a slightly modified version of the present, it is usually very different hence I wanted to explore how Investors and Economists perceive the future.
Investors (mostly traders) are people who act as things happens, they think independently, anticipate things that haven’t happened yet, and put real money at stake with their bets. For this reason, we say asset prices reflect the investor’s optimism of the future, even though expectations can be biased based on experience (story for another day). This explains the disconnect between markets and the real economy during the peak of the pandemic. Markets are driven by leading indicators, where as the real economy is more driven by lagging indicators.
Economists (mostly policymakers) come from environments that nurture consensus, not dissent, that train them to react to things that have already occurred, and that prepare them for negotiations, not placing bets. For this reason, we say economists are forecasters of the future hence they will never give you a straight answer as there is always a worse and best case scenario, everything “depends” on something. This explains why they do not fear what they haven’t experienced before, because for them economic cycles are normal as they are taught that for every peak, there’s a trough.
So who has the upper hand, doers or thinkers?
Investors hold money but economists influence the direction of money, so why are traditional models failing if they supposedly know their lanes?
Image Soucre: Biz News
From my observation, economists have an oversimplified way of discerning how markets and economies work because they are too academic. The misconception that investors are “the markets” is misguided, because when markets are down policymakers are so quick to drive sensation in an attempt to increase confidence then wait on the sideline hoping for problems to disappear. This method discounts other players in the markets who buy and sell for different reasons; who borrow and lend based on economic conditions; and make decisions to please stakeholders.
Simply increasing confidence denotes intricacies of how business decisions are taken. They do not account whether buyers have enough money and credit to buy all the debt that had to be sold. They do not account whether companies will choose to halt dividends and invest in a new division instead; or service decade looming debts instead of investing in new equipment or hiring. When economists advocate for infrastructure development, no one asks whether entrepreneurs have the capacity for that task.
The point is, in future, economists should be realistic when diagnosing economic problems by understanding the mindset of the people in that environment, just like how investors tend to have a Keynesian beauty contest way of making decisions. In South Africa, like most emerging markets, investment is consumer driven meaning businesses tend to wait for a demand before investing, therefore our economic tools should be consumer focused. So understanding the environment in making future decisions is key for both Investors and Economists.
Being an economist, investor and now entrepreneur has allowed me to see economies in a different lens and have a holistic perspective when I advice, and that’s what I have always wanted – to advice based on experience and not academics only. I’ve always learned best by doing despite being an innate thinker, and that is why I will forever respect economists who have a business background or who trade on financial markets, because that allows them to have an individual’s perspective. In life there are situations that cannot be solved academically and it takes an honest person to acknowledge, accept and adapt to that.
So to answer the question, who has the upper hand? Individuals who think out of the box and act on it!
Dalio, R. (2017): Principles: Life and Work. Simon and Schuster: New York.
Kganyago, L. (2020): Monetary Policy in the Shadow of COVID-19. UP and South African Reserve Bank webinar.
Available from: https://www.youtube.com/watch?v=EdNrJk_YzEA&feature=youtu.be
Pienaar, H. (2020): Pulling the levers for growth: The role of infrastructure investment, structural reforms and energy. Bureau for Economic Research.