Open ended thinking
Thomas Sowell Economic Facts and Fallacies location 188:
Apply this error to human thinking in general. Perhaps you are in an organization to raise money for 'open
lands'. In this case, you are for an open-ended policy of open lands simply because you are making your
money off of the policy and the more emphasis on open lands the better for you.
Let us say that you owned a newsletter that promoted and sold gold and gold coins. In this case, you would
want to promote an open-ended policy of "people buying gold and gold coins" indefinitely. No end in site,
no limit to buying and at no time in history did you ever recommend selling gold and at no time in the
future will you recommend selling gold. This may be a good policy for you, the newsletter writer, but it is
obviously not a good policy for the readers at a time when gold goes down in price.
If you are an investor, you want to steer clear of newsletters which promote one theme which promotes their
own agenda.
So, according to Carl Pacifico, humans are likely to fix on an idea such as 'inflation is coming' or 'gold will
rise in price' and henceforth look for evidence to prove what Carl calls "the first information" as noted in
point 1 above.
Let us try this out on three humans and see what happens. The scenario is as follows:
The current year is 2000 and gold is selling for $250 per ounce.
There will be 300% of inflation over the next 12 years.
Human1 reads an article about gold in the year 2000 sees its potential to earn 300% over the next few
years. He purchases $100,000 worth of gold at $250 per ounce and sells it at $1000 per ounce in 2007 for
the predicted profit.
Human2 reads the same article but not until gold has risen to $700 per ounce. He invests $100,000 in gold
at $700 per ounce and is waiting for it to go to $2100 per ounce.
Shouldn't Human2 make a different decision because gold has already risen? At $700, hasn't the price of
gold already been partially discounted? Should Human2 be expecting $2100?
Human3 is another person brought in to the gold investment by salesmen who are advertising gold widely.
Human3's error is that he has a totally 'open-ended' goal for the price of gold. Although he is getting in
before the actual hyper-inflation actually occurs between 2009 and 2012, he hasn't taken into account the
fact that the price of gold has already 'inflated by 300%'. He expects that hyperinflation is coming and the
more gold he owns, the better. In 2008, human3 buys $100,000 worth of gold at $1000 per ounce.
When the actual inflation comes, the price of gold will peak out at $3000 per ounce and then settle down at
$1000. If human3 has open expectations for the price of gold, when the inflation actually comes he will
become smug and tell everybody that "I knew this was going to happen". Will he sell at $3000 or will it drift
down to $1000 per ounce as projections are that inflation will be curbed by FED policy?
He could have purchased real estate for 10% down payment at good prices in 2009. Ten percent down
using $100,000 would purchase a one-million dollar property which would presumable rise to be worth $3
million during the 300% hyper-inflation period. By contrast, $100,000 of gold will rise briefly to higher
prices potentially giving him a $200,000 profit if he sells quickly at the high. Remember, if gold was at $250
per ounce and net inflation is 300%, the final resting price for gold will be about $1000 per ounce in the
long term after digesting a 300% inflation. According to our scenario, that would be 2012.
So, you ask, if that is true, why didn't my gold newsletter tell me to buy real estate? The answer is because
they are in the business of selling newletters regarding gold and many of their advertisers are selling
something gold or silver related. Real estate would be touted in a real estate newsletter.
All three humans made the mistake of focusing on only gold and the details about gold. Are central banks
accumulating gold? Is hyper-inflation coming soon?
Next
Thomas Sowell Economic Facts and Fallacies location 188:
- No matter how much is done to promote health, more could be done. No matter how safe things have
been made, they could be made safer. And no matter how much open space there is, there could be
still more. Obvious as this may seem, there are advocates, movements, laws, and policies promoting an
open-ended commitment to more of each of these things, without any indication of a limit, or any
principle by which a limit might be set, much less any consideration of alternative uses of the
resources that some people want devoted to whatever desirable thing they are promoting.
Apply this error to human thinking in general. Perhaps you are in an organization to raise money for 'open
lands'. In this case, you are for an open-ended policy of open lands simply because you are making your
money off of the policy and the more emphasis on open lands the better for you.
Let us say that you owned a newsletter that promoted and sold gold and gold coins. In this case, you would
want to promote an open-ended policy of "people buying gold and gold coins" indefinitely. No end in site,
no limit to buying and at no time in history did you ever recommend selling gold and at no time in the
future will you recommend selling gold. This may be a good policy for you, the newsletter writer, but it is
obviously not a good policy for the readers at a time when gold goes down in price.
If you are an investor, you want to steer clear of newsletters which promote one theme which promotes their
own agenda.
- Carl Pacifico has written that humans act as follows:
1. Your brain uncritically accepts the first information it gets in any new
subject area as correct, whether it is or not.
2. Subsequent information that is in keeping with the information already
present in your brain is uncritically accepted as correct, whether it is or
not.
3. A new item that is contradictory to the information present in your brain is
automatically rejected as incorrect, whether it is or not.
4. Your brain considers every item that is compatible with the majority of its
information in a given subject area to be correct and every item that is
contradictory to its information to be incorrect. As a result, the brain has no
internal way to know which items of its information are correct
representations of the real world and which are not.
5. Your brain has no way to know whether or not it has all the information
required to respond appropriately to a given stimulus.
6. Unless your brain has additional information to the contrary, it interprets
similar items as being identical.
7. Your brain cannot measure anything directly. All measurements must be
made by comparison against an appropriate standard, which is often done
incorrectly.
8. Your brain continues to interpret the external world as it was when the last
sensory signal about a given subject area was received. As a result, the
brain is not aware that some of its formerly correct information is now
incorrect.
Refer to:
http://carlrpacifico.com/CommonErrors.pdf
So, according to Carl Pacifico, humans are likely to fix on an idea such as 'inflation is coming' or 'gold will
rise in price' and henceforth look for evidence to prove what Carl calls "the first information" as noted in
point 1 above.
Let us try this out on three humans and see what happens. The scenario is as follows:
The current year is 2000 and gold is selling for $250 per ounce.
There will be 300% of inflation over the next 12 years.
Human1 reads an article about gold in the year 2000 sees its potential to earn 300% over the next few
years. He purchases $100,000 worth of gold at $250 per ounce and sells it at $1000 per ounce in 2007 for
the predicted profit.
Human2 reads the same article but not until gold has risen to $700 per ounce. He invests $100,000 in gold
at $700 per ounce and is waiting for it to go to $2100 per ounce.
Shouldn't Human2 make a different decision because gold has already risen? At $700, hasn't the price of
gold already been partially discounted? Should Human2 be expecting $2100?
Human3 is another person brought in to the gold investment by salesmen who are advertising gold widely.
Human3's error is that he has a totally 'open-ended' goal for the price of gold. Although he is getting in
before the actual hyper-inflation actually occurs between 2009 and 2012, he hasn't taken into account the
fact that the price of gold has already 'inflated by 300%'. He expects that hyperinflation is coming and the
more gold he owns, the better. In 2008, human3 buys $100,000 worth of gold at $1000 per ounce.
When the actual inflation comes, the price of gold will peak out at $3000 per ounce and then settle down at
$1000. If human3 has open expectations for the price of gold, when the inflation actually comes he will
become smug and tell everybody that "I knew this was going to happen". Will he sell at $3000 or will it drift
down to $1000 per ounce as projections are that inflation will be curbed by FED policy?
He could have purchased real estate for 10% down payment at good prices in 2009. Ten percent down
using $100,000 would purchase a one-million dollar property which would presumable rise to be worth $3
million during the 300% hyper-inflation period. By contrast, $100,000 of gold will rise briefly to higher
prices potentially giving him a $200,000 profit if he sells quickly at the high. Remember, if gold was at $250
per ounce and net inflation is 300%, the final resting price for gold will be about $1000 per ounce in the
long term after digesting a 300% inflation. According to our scenario, that would be 2012.
So, you ask, if that is true, why didn't my gold newsletter tell me to buy real estate? The answer is because
they are in the business of selling newletters regarding gold and many of their advertisers are selling
something gold or silver related. Real estate would be touted in a real estate newsletter.
All three humans made the mistake of focusing on only gold and the details about gold. Are central banks
accumulating gold? Is hyper-inflation coming soon?
Next
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