Undercover Economist

When doing nothing is the best option

The leaders of the free world are returning from their holidays. Must they? Surely no good can come of this.

While on vacation Donald Trump managed to eject most of his advisers, threaten a nuclear war with an unabashed North Korea, and display an unnerving willingness to see things from the Nazi point of view. Goodness knows what he will do now he’s fully back on the job. Theresa May returned from her Easter holiday with the splendid idea of calling a snap general election, so I can hardly contain my excitement as I wait for her latest brainstorm.

A flawed leader leaves us grateful for the quiet days, and one of the saving graces of Mr Trump’s administration is that, while he has many bad ideas, he is not always committed to them. Promising to build a wall, rip up Nafta and discriminate against Muslims and transgender people is damaging enough, but at least the follow-through has been patchy. It is a fragile mercy, but Mr Trump seems to prefer complaining about the US government to leading it.

Mrs May’s lack of leadership is more valuable. The British people have dealt the British establishment an unplayable hand: a parliament strung out between several lunatic fringes, and a referendum result that is hard to interpret and even harder to deliver. With the prime minister powerless, her ministers are showing signs of quiet realism. Yes, the country is chugging towards a train-crash Brexit, but at least our politicians are tying fewer hostages to the tracks.

Since I disagree with most of what Mrs May and Mr Trump are trying to do I might be expected to celebrate every day on which they do not do it. But there may be a deeper principle here: in many areas of life we demand action when inaction would serve us better.

The most obvious example is in finance, where too many retail investors trade far too often. One study, by Brad Barber and Terrance Odean, found that the more retail investors traded, the further behind the market they lagged: active traders underperformed by more than 6 percentage points (a third of total returns) while the laziest investors enjoyed the best performance.

This is because dormant investors not only save on trading costs but avoid ill-timed moves. Another study, by Ilia Dichev, noted a distinct tendency for retail investors to pile in when stocks were riding high and to sell out at low points.

It would be nice to recommend laziness as a universal principle, but alas many companies have turned consumer inertia into a revenue stream. Sometimes we must rouse ourselves to cancel a gym membership or find a cheaper insurance policy. Still, there are many situations where doing nothing is a sound tactic.

The same can be said of medicine. It is a little unfair on doctors to point out that when they go on strike, the death rate falls. Nevertheless it is true. It is also true that we often encourage doctors to act when they should not. In the US, doctors tend to be financially rewarded for hyperactivity; everywhere, pressure comes from anxious patients. Wiser doctors resist the temptation to intervene when there is little to be gained from doing so — but it would be better if the temptation was not there.

Some politicians expertly dodge demands for action. Tony Blair was often accused of recycling announcements, turning a single policy into a dozen press releases. But better one decent policy announced a dozen times than a dozen half-baked policies each announced once.

The argument for passivity has been strengthened by the rise of computers, which are now better than us at making all sorts of decisions. We have been resisting this conclusion for 63 years, since the psychologist Paul Meehl published Clinical vs. Statistical Prediction. Meehl later dubbed it “my disturbing little book”: it was an investigation of whether the informal judgments of experts could outperform straightforward statistical predictions on matters such as whether a felon would violate parole.

The experts almost always lost, and the algorithms are a lot cleverer these days than in 1954. It is unnerving how often we are better off without humans in charge. (Cue the old joke about the ideal co-pilot: a dog whose job is to bite the pilot if he touches the controls.)

Perhaps it is no coincidence that many august institutions are designed not to support wise action but to prevent foolishness. Supreme courts, independent central banks and the EU are often at their best when applying the brakes. No wonder so many of the deepest Eurosceptics — from Jeremy Corbyn to Marine Le Pen — are the politicians with the longest list of self-harming policies.

It is human nature to believe something must always be done. Yet we overrate our abilities to do it and it is awfully hard to make the case for passivity. The task is not made easier by campaigners wanting a policy, newspapers wanting a story or the patient wanting a pill. Who dares to offer them nothing?

Written for and first published in the Financial Times on 1 Sep 2017.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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