Facts are Facts, Right?

Both The Economist (November 9-15, 2013) and Forbes (December 2, 2013) took up the banner of inflation as 2013 wound to a close. Interestingly, The Economist wrote of “the perils of falling inflation,” suggesting that inflation needs to be increased, at least to 2 percent, perhaps 2.5 percent. Steve Forbes countered, rather emphatically, that The Economist and others promoting this viewpoint are bereft of sound economic thinking.

According to the US Bureau of Labor Statistics, 12-month inflation at the end of October, 2013, stood at 1 percent[1]. This is a fact, isn’t it, that neither The Economist or Forbes can argue (regardless if we use the headline or core number)? After all, they aren’t arguing the actual number or even how it is calculated. Instead, they are arguing if the current rate of inflation is good or bad.

The Economist speaks of the “costly side-effects” of low inflation, such as nominal income growth, debt repayment, and the ability of central banks to fight a future recession. Forbes, on the other hand, relates inflation to the value of currency and to inflation as a form of taxation. Why, then, can these two prestigious magazines have such diametrically opposed perspectives on such a highly publicized fact?

In part, the answer can be found in this statement from Richard Wurman’s 1988 book, Information Anxiety. “Facts in themselves make no sense without a frame of reference. They can be understood only when they relate to an idea….Ideas precede our understanding of facts, although the overabundance of facts tends to obscure this. A fact can be comprehended only within the context of an idea. And ideas are irrevocably subjective, which makes facts just as subjective.”[2] The Economist and Forbes diverge on what the rate of inflation means because they have incongruent ideas about inflation. Same fact, different ideas, contrasting interpretations.

Their respective views on inflation are also most likely shaped by a behavioral finance characteristic known as confirmation bias, in which “our conclusions are unduly bias by what we want to believe.”[3] Forbes, for example, is a big believer in the gold standard and a strong currency, both contrary to a rising inflation agenda. It is not unreasonable, though not necessarily deliberate, to expect a writer to be influenced by facts that support their perspective. [Note to self: all of us are potential victims of confirmation bias.]

Another consideration in the discussion of facts: statistics are not often helpful in and of themselves. Context and scale are needed to make statistics relevant.[4] In this light, Forbes estimates that an inflation rate of 2-2.5 percent will cost “a family making $40,000 annually an extra $800-$1,000 a year in higher prices,” providing scale that readers can comprehend.

The point of this argument is neither to critique these publications nor evaluate the current state of inflation. Rather, it is to call attention to the rather nebulous nature of facts. We know with certainty what inflation was at the end of October, 2013. That is a fact. But, and this is huge, what is the meaning of that 1 percent?

Upon closer inspection, we realize several points about facts that are germane to each of us. Our ideas about an issue are reflected in how we perceive a fact. Right or wrong, we are often influenced subconsciously by what we believe. Facts need to be placed into context and provided scale to be relevant and effectively understood.

We are inundated with facts each and every day. The framework in which facts are presented matters; most facts do not. Most of what is presented as fact is simply not relevant to us as investors, the certainty of its meaning suspect. We should look for those facts that are actionable given our individual circumstances. Beyond that, let others ponder the impact of the daily deluge.

[1]US Department of Labor, Bureau of Labor Statistics, CPI Detailed ReportOctober 2013. http://www.bls.gov/cpi/cpid1310.pdf, March 15, 2014, p. 2, 5.

[2] Wurman, Richard Saul. Information Anxiety. New York: Doubleday, 1989, p. 56-57.

[3] Tvede, Lars. The Psychology of Finance Revised Edition. West Sussex, England: John Wiley & Sons, Inc., 2002, p. 135.

[4] Heath, Chip and Dan Heath. Made to Stick. New York: Random House, 2007, p. 146.