Light Switch Thinking

I emphasize careful data analysis in all cases, regardless of my own preconceptions or feelings on a given issue (see Politics). In doing this analysis, my fundamental principle is to avoid thinking in black and white. Qualifying data in different shades of gray provides far greater opportunities for insight.

One major post where I discuss my careful analytic method is Thinking Like an Economist: When Does it Pay Off?  (April 8, 2010). A small excerpt:

I was recently asked to participate in a poll of bloggers that had a number of dubious questions.  Typical was whether the Las Vegas City Center complex would add new traffic or would cannibalize the existing base.

This was an awful question — typical “light switch” thinking.  It is what you see on financial TV and opinion blogs.  It encourages a terrible habit for investors — thinking that something is black or white, instead of a distribution of results.  The honest answer (a little of both) does not make for an exciting story.”

I further explore the impact sensationalist journalism has had on how we view the economy in The Economy: Problems and Solutions (January 14, 2008):

“Most market pundits see this as a black-and-white, light switch kind of problem.  There is an economic problem.  It is up to the Fed to act.  They should cut rates aggressively.  The Fed does not see what we do, therefore they are slow in acting.”

On occasion, pundits will make the case for more nuanced analysis. I was struck by a particularly insightful comment by Maria Bartiromo, featured in the post How to Win a Recession-Predicting Contest (April 2, 2008):

“’[T]he truth is, [‘Today’ co-anchor] Meredith [Vieira], it doesn’t matter if we’re in a recession,’ Bartiromo said. ‘We can talk ourselves into a recession, and that seems to be what we’re doing right now and that certainly begets more weakness.’”

I was once interviewed (June 3, 2010) by Charles Kirk of The Kirk Report. Amongst other things, I discussed the issues with light switch thinking when it relates to criticizing economic models.

“It is fine to be skeptical, to look for bias, and to challenge information. Nearly everyone goes too far in this direction — way too far. It is what I call “light switch” thinking. It is far wiser and more profitable to get the best information from each source.

I am particularly troubled by the reaction to formal models. The criticism of models comes mostly from those who know nothing about them.”

A particularly colorful example of simplistic thinking came out of the 2012 Presidential Election. Rush Limbaugh alleged at the time that Obama had directed the National Weather Service to order evacuation warnings for the site of the GOP convention ahead of an incoming hurricane. Though this was certainly worth a chuckle, it’s worth noting that investors can fall into the same sort of trap if they’re not careful.

First, this is a classic example of one of the most common fallacies people have about government. Keep in mind this isn’t any sort of partisan issues.  Pundits of all stripes are susceptible to this same sort of thinking. The temptation to view bureaucracy as a monolithic entity, always obeying the President, is strong, but severely misguided.

In fact, the relationship between any US President and the federal bureaucracy is very complex. The scientists and bureaucrats working in the National Weather Service have long careers that transcend several presidential administrations. The so-called skeptics who suggest conspiracy at every turn should stop and think of Occam’s Razor: That which can be asserted without evidence, can and should be dismissed without evidence.

Second, it is what I call “light switch thinking.”  Most events involve probabilities, not a “yes or no” outcome.  No matter what the outcome in Tampa or New Orleans, the risk was there.

No matter the outcome on the policy effects of Bush, Obama, and the Fed, the actual result must be compared with what would otherwise have happened.