Blindsided by Brexit Bias

Unbalanced

The result of the UK’s referendum on the EU caught markets by surprise. They’d soared the previous day in the expectation of a Remain vote and were thrown into turmoil when it turned out a majority of the British were less concerned with economic stability and more with mass immigration.

The polls leading up to the referendum were finely balanced; if they were to be believed then the result was far from certain right up to the end. Yet many people took the market surge at face value – that markets were pricing in known information -  and that a Remain vote was in the bag. But it wasn’t, and the whole thing is behavioural bias writ large. Not that anyone will actually learn the lessons of course.

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de Tocqueville: Trust in Self-Interest

And I assure you that all the peoples and populations who are subject to his rule are perfectly willing to accept these papers in payment, since wherever they go they pay in the same currency, whether for goods or for pearls or precious stones or gold or silver. With these pieces of paper they can buy anything and pay for anything.
 

(The Travels of Marco Polo)

A Culture of Trust

When thirteenth century Western travellers reached the Chinese border they were forced to exchange their precious bags of gold and silver for apparently worthless paper notes. This created a certain amount of angst amongst the traders which was relieved only when, as Marco Polo recounted, they discovered that their paper was happily accepted by merchants within China, was backed by hard currency redeemable on request, was easily exchanged, easily transported and thus promoted commerce.

These exchanges encapsulate the nature and importance of trust, and the difficulties of establishing trust between different cultures. Why would you trust paper money if you’d never seen it before? Underlying this, though, is a deeper question: how can trust thrive if we’re all self-interested egotists, as modern economics expects?

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