Introduction: our difficult relationship with Statistics
The most rewarding thing of specializing in a specific field that is defined internationally instead of domestically is that your world gets smaller. Or should I say: our scope and outlook gets bigger? Not sure, but we believe that we are lucky. International investment consultancy focusing on Emerging Countries and Asset Allocation enables you to analyze different countries, travel to them and meet people from those countries.
One of the most appreciated aspects of this internationalization of scope is that you find out that in the end we are all human and that the differences between us are far smaller than the similarities. Don't get us wrong, we are not idealists. Not at all. But by combining the qualitative, (inter-) human experience with quantitative and statistical rigor we feel that we are capable of uncovering a lot of ridiculous fears, theses, anecdotes, dogmas and things that are just plain wrong.
Sometimes these stories are 'innocent' in nature and just make you smile. Like the one in which it is shown that far more than half of the people in the world believe that they are great car drivers. And within the male group an enormous percentage believes they are better drivers than both their neighbor or more in general: women.
Now: taking into account that most men are not living next to female neighbors that provided them with this first hand empirical knowledge, even a little bit of statistical knowledge would already lead us to the conclusion that this cannot be true. And of course, the majority believing that they are better than the average can only be right when they define it as a question that is not about the number of drivers but about some kind of driver rating. In the latter case it could be possible that the bulk of people is slightly better than the average with the remaining minority being terrible and a danger on the road (i.e. far less good than the average rating). But that is not how people interpret it. Most of the time they just refer to the number of drivers, making it clear that their application of statistics is more than flawed.
This is corroborated by the fact that most people immediately reconsider flying by plane after a plane accident somewhere in the world, with quite a few canceling their flights and/or ask for government committees to analyze what happened. The next moment they are happy to jump into the car, exposing themselves to a statistically far bigger danger. Even on days when the daily number of car deaths exceeds that of the number of victims in the plane crash that day.
And it is even worse with 'international' statistics
The moment that we move international things get worse. In a previous entry we talked about the strange 'home' and 'foreign' biases in investments. The 'home bias' was well documented for a long time already, implying that people overweight their investments in the domestic market because of a combination of currency reasons and risk considerations. The other man's grass is not greener, but things at home seem safer. Isn't it true that we do know more about what is going on at home? To some extent yes, but how sure are we that this extra knowledge is 'priced' and that it will give us extra return or lower risk? Most of us don't know and don't care: with respect to things happening at home we feel more safe. Period.
The 'foreign' bias is part of a body of research that entered the academic investment world more recently. It is related to us emotionally feeling different about all kinds of factors related to risk, return, fear, justice et cetera when comparing different places in the world outside our own country.
Conclusion of the research: the larger the cultural difference and/or the bigger the 'fear' (correctly so or incorrectly so, that is not even important), the larger the 'foreign bias'. I.e. the bigger the underweight in our investment portfolios for those regions.
And: the impact of this flawed international factor extends far beyond investments. Even in a period of 'Globalization' the good old xenophobic monster is still alive and kicking. Sometimes we believe that it might actually have grown. Why? Well, if something is totally foreign and strange and you know nothing about it, didn't see it on TV et cetera, it is just plain exotic isn't it? It is only when we start to build knowledge in the terribly flawed way that is second nature to most humans - i.e. including flawed applications of statistics - that we end up with strange 'foreign biases'.
That is what we thought of when finding the attached link below in a Twitter message by one of our information sources.
The US Embassy in Slovenia came up with the following list (see URL link at the bottom of this article) for US citizens traveling to Slovenia. Some of you might think, those people in the Embassy know what they are talking about. I don't doubt that this is what they talk about. But is it based on unbiased knowledge? Definitely not. When looking at crime statistics on a global scale it is true that Eastern Europe is not Vatican City, but then again there are dozens of places in the US that aren't exactly nice spots to visit either.
But in all cases it is still true that the car trip to get at your destination from the airport is probably of similar danger...and we would almost be inclined to say: no matter where you are, when not knowing much about the place you are visiting. I still remember the time when people traveling to Miami had to be told how to get to South Beach from Miami International Airport. 'Don't take the wrong turn or you might end up in dangerous territory where Hispanic gangs rule'. Actually, one of our principals recalls that something like that ended up in the assassination of a German tourist exactly at a time when our principal was there to do a presentation at a seminar at the Fontainebleau Hilton at South Beach.
Did or do we translate that into the idea to create warning pages in German on some kind of new website project of LMG, on a page entitled 'Risks in the US'? Not at all: to be honest, when reading what happened to the German traveler our principal felt that the guy was kinda asking for trouble, being plain ignorant. Same in Washington DC. Not sure how things are these days, but we recall that years ago when doing a presentation there we ended up driving past Capitol Hill in the direction of Baltimore finding ourselves in a neighborhood that looked different. And when we say 'different' we mean different not in a negative way. True, it was a deprived part of town, but different has to be interpreted as us understanding that we probably should not be there at that time looking the way we did and with the things we were carrying. A similar connotation as the one we would have in certain parts of Amsterdam, Rotterdam, Utrecht here in the Netherlands. Again: it is also a matter of adjusting. Our principal would not be scared to go there, just that he would dress appropriately, act differently etc.
Aha! Now we are getting somewhere. So when it is in our own country, we often immediately sense or understand where we should not go or how we should act. What about international?
Aren't governments right with pages like the attached one about Slovenia? No, read through it and see that it is a general text. Not a text telling us where not to go, what not to do etc. In our own country we do not say that we should not live there because of the danger in neighborhood X of city Y or because yesterday this or that plain was hijacked or a bank robbed some 500 miles away. Internationally we loose track of nuance and generalize. Scary that this is official policy. And believe us, this is definitely not something only American government officials in embassies and consulates do albeit that they are above-average sensitive to it. You can already see that in the approach of many Americans to international investing. Institutional investors in the US still define asset class allocations as either domestic or international. Not some kind of geographical distinction that enables you to fill in nuance. Nope: it is either 'domestic' (read: safe) or 'international' (read: scary). The moment you act like this, you are asking for trouble.
Other countries are sensitive to the same problems, with all of those non-cosmopolitans traveling abroad and believing that they should not adjust adding additional fuel to the problem. Be sure that every sub-urbian American tourist will adjust when visiting the wrong parts of Chicago, LA, Miami, Washington, New York, Detroit, Philadelphia or Atlanta. Or even better: they would probably not go there and definitely not talking loudly suggesting it is their prerogative to be who they are with shorts, colorful shirt and camera in front of them. They are not crazy! Who would want to be dead! But whereas in our own country we translate news about victims ending their life this way (or when they are lucky just ending their relationship with their wallet and golden watch!) as 'Was the idiot asking for it?', we often translate it into outrage about foreign countries and foreigners when it is about some other country. And the more different the country, the larger the probability of ending in trouble with the unadjusted behavior and the larger the probability of us translating it into country fear and an increased foreign bias.
And voila: half of the problems with Eastern Europe and the Middle East are explained. Eastern Europe and the Middle East are areas where still quite a few Westerners go to and that somehow are culturally reasonably different. Result: the biggest probability (and now we are talking real statistics) of ending up in trouble when not applying true rational cosmopolitan savviness. Governments can do a great job preparing their people for this kind of experience. And people themselves can do even more: learn how to read Statistics as if they are the same stuff as what you experience nationally. The world is your oyster, there aren't two oysters: a criminal one abroad and a safe one locally.
It is therefore that we had to smile, but at the same time shake our head reading the attached page from the US Embassy in Slovenia. So just plain wrong! But one of the good things of the US is that they do at least write these things down, register and record so that sooner or later we can test and proof how ridiculous this all was. In many other nations government opaqueness ensures that international anecdotes and folklore can continue almost forever. See for instance the recent suggested changes to press laws for both national and international journalists in Hungary. But then again: seeing this incredibly poor page, we had to think of something else. Something we wrote earlier as well.
What has Wikileaks to do with Xenophobia?
When seeing this stuff, it confirmed our fears that it is not Julian Assange that we have to fear. Or the deeper information content of Wikileaks. It is good that there is a certain level of transparency and those scattered, fragmented cables were of a level that was so questionable that - if this were supposed to be an important source of information in International Politics - we are just plain lucky that we did not yet experience a Third World War. Thank God at the higher levels people are smarter. It reminded us of those Chess Pundits that are always present at matches about the World Championship. While the Grandmasters playing the match for the big title (with chess knowledge 1000 times bigger than that of the audience) think for 10-20 or more minutes before doing their next moves in complicated positions most pundits know what to play within a few seconds or at best minutes.
Beati Paupera Spiritu as the Roman Bible says. Lucky are those who enjoy the 'benefit' of a simple mind. And then we are back in our standard LMG story about a world that is not black or white but shades of gray. People don't like gray. At home the blanket covering their world is transparent so that they don't fear an excess number of gray situations. But when abroad most of us - knowingly or unknowingly - translate our ignorance into covering that world with an opaque blanket. Result: less things seem white, what is gray turns black and what is black turns even blacker.
And that is what we learned from the Wiki cables. A big sequence of simple minded blanket fragments translating the world outside our own nation into a caricature.
We are fully aware that quite a few of the examples we were able to use during the last three quarters of a year to stress our point about the world being shades of gray and not black-white were related to the US. Are we Anti-American? Not at all, when looking at the developed world as basically three blocks - North America, Europe and Asia-Pacific - we actually believe that Europe is the sickest man of all three. And be sure that there will be plenty of examples, albeit probably more economic in nature and less political, in which we will illustrate this. But to some extent our role as researchers and commentators when translating news into more in-depth pieces of evidence and/or quantitative factors that find a place into our valuation or risk systems is a bit like that of stand-up comedians. The bulk of news flows in sequences consisting of different types of news. Sometimes this or that country is in the spotlight. Sector distributions over time differ too when it comes to information flow et cetera.
Actually: when reading the economic news in US media, if anything, we have a feeling that LMG is far more optimistic about positive dynamics in the US society than many Americans themselves. And that is in a way also the result of what one could label natural behavioral flaws mixed with Xenophobia. At a time when the world is recovering from a big crisis, people tend to extrapolate (now negative) trends too long. Just like they will extrapolate the next recovery too long. New for Americans is that they are not the sole catalyst of the world anymore. China and other Emerging Countries are now important as well, economically. And that leads to the introduction of some xenophobic tendencies into the analyses of even good economists and policy makers who previously got used to thinking mainly domestically and/or of a world led by the US economic machinery with Europe in a comfortable second place. We believe that M&A opportunities within the US are popping up in numbers that almost grow by the day. It is just that people have to get used to investors with big pockets now being foreign entrepreneurs as well. And when we say foreign we mean truly foreign. I.e. not an Irish firm buying an enterprise in Boston, or Carlos Slim from Mexico buying stakes in firms in El Paso, Texas. Nope, we are talking about Asian firms or even Middle East Wealth Funds buying substantial stakes in large stockmarket-listed entities on Wall Street.
Dozens of text books have been written about this topic. International M&A's. Most good texts published by US publishers. But when reading them it became clear that it was still mainly understood as US firms or private individuals buying stakes abroad. Be happy that in a period of crisis things are now a two-way street!
What is scary here? Official Link to US Embassy Website (Slovenia)
I am sure that those who live in Slovenia or have visited the country will be smiling now. Of course: there is always a few examples who did experience bad luck OR (but they won't admit) who did something silly. You can react but be warned: we will apply proper statistics when using your input in (re)defining our judgment.