Admitting when you’re wrong

I remember back when I was a lowly macro analyst that I often had occasion to contemplate the implications of being wrong.

Being wrong sucks, in part because you are usually aware that you have been wrong  only after the market has moved against your take. And extremely irritatingly, the market always seems to have moved just a delta too far, which makes you think, well now would be a really poor time to come clean. Bygones.

Usually, when you hesitate like that you are a) understating how wrong you have been and b) overstating the extent to which the market has already discounted your wrongness.

Mr. Market: listen up, that is just the preamble! I am holding some truths to be self-evident here, among them, that you are a moron. And I am going to enumerate them in great detail to extract maximum pain. 

It hurts even worse to be wrong if you are a portfolio manager and playing with live ammo, rather than just words and sense of self.  PMs have it tougher and the good ones are paid accordingly. (Some losing PMs are also paid well, just not where I last worked.)

But I was often envious of how little fanfare the PM faced when when cutting a losing position. He would hit a button or pick up the phone for 30 seconds and that was it, at least until risk management came along and asked, what happened there? Not sotto voce: can we discuss this later?!

For the analyst, though, it is a much more complicated psychological process. The false premise underlying the analyst-PM split is that the analyst knows something objectively true about his space.  When admitting error, the analyst has to reveal that premise for  what it is: false. And that can be humiliating, which can slow things down, relative to ideal and relative to the speed at which a PM can move.

My faith in this pet hypothesis is reinforced somewhat when I see PM’s delaying really badly in taking a loss on an idea that is not in their portfolio but instead in their public pronouncements.

Just to take a random and totally made up example,  a biotech PM might have said just for shits and giggles that going over the fiscal cliff would be bullish, because it would fix the deficit.  That view is obviously stupid and would be severely punished by the markets, which is why a good macro trader would not express it in his portfolio.

But for the biotech PM it is something that would neither be in nor not be in his portfolio.  It is something he would talk about rather than trade on. And such talking puts him in the position of the analyst, very slow to admit the error.

Consider the case of Peter Thiel, who for these purposes I will call PM rather than analyst.  Obviously, Peter Thiel knows how to act in his capacity as investor.

But his continued public attachment to Donald Trump is increasingly embarrassing and at odds with what I have to assume are his own values.  But he can’t just quietly close the trade and move on, because it is not a trade but something he has loudly talked about.

He is dug in, like an analyst.

Must really suck these days to be Peter Thiel. Not that I feel sorry for him. The party of personal responsibility needs occasionally to take some. Hopefully, this will sting a bit for a while.