This time of year is filled with retrospectives and "best of" lists. I'd prefer a more enlightened discussion about bad ideas. Or rather, zombie ideas: the memes, theories and policies that refuse to die, despite their obvious failings. Why do we embrace the terrible, fall in love with the wrong, bet money on the fictitious? Nowhere is this truer than in the fields of economics and investing. Together they have produced a long list of thoroughly debunked ideas. Despite this, many of these zombie ideas still have a vice grip on amateurs and professionals alike. What is it about us and this intellectual voodoo? We keep repeating the same mistakes over and over. It is maddening. Let's count the ways:
1 Shareholder value: Since the early 1980s, this theory had claimed that corporate management should concentrate primarily on increasing share prices. In practice, it is fraught with problems: Short-term focus on quarterly earnings leads to a decline in long-term research and development, typically to the detriment of a company's long-term prospects. Short-termism and stock-option compensation causes management to focus on immediate quarterly returns. It has also led to earnings "management," accounting fraud and a raft of management scandals. Shareholders derive much less value than the name implies.
2 Homo economicus: A primary principle underlying classical economics, it states that humans are rational, self-interested actors possessing an ability to make objective, intelligent judgments about matters of investing and money. This turns out to be hilariously wrong. We are all too often irrational, frequently emotional and regularly engage in behaviors that work against our self-interest. Homo economicus? Try Nogo economicus.
3 Economics as a science: Consider how wrong the economics profession has been about, well, nearly everything: They misunderstood the risks of derivatives; economists developed models that assumed home prices would not fall (!). They misunderstood why the recovery from the 2001 recession produced so few jobs or why the current recovery was worse in so many ways. Oh, and despite myriad signs, they missed the worst recession since the Great Depression even as it was on top of them. The sooner they admit that their field is not a hard science, the better off we all will be.
4 Austerity: Conceived from the puritanical idea that we must pay a penance for our sins, the Austerians (as we like to call them) insist that a post-bubble economy can be cured with spending cuts and tax increases, producing a balanced budget. When the United States tried this in 1938, it helped send the nation back into recession. More recently, Greece was forced to adopt austerity measures as part of its financial-rescue terms. It pushed the country into a depression. Austerity measures in Britain and Ireland and Spain — indeed, everywhere they have been imposed in Europe — have all led to recessions. Despite the wealth of evidence showing that this is a terrible idea, it refuses to die.
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