The Gell-Mann Amnesia Effect

I think it’s about time I do a post centered on Elon Musk. He’s probably the most talked-about person in the world right now—at least it feels that way in a lot of the circles I find myself in. But the thing is, I haven’t really cared or have had any takes on his quest to buy Twitter, his weird feud with Bill Gates, or even his pumping of Dogecoin.

However, he did send out a tweet a handful of days ago (by the time you’re reading this it will have been a few weeks ago) that caught my attention:

Elon Musk @elonmusk

@pegobry @pmarca Exactly. Right before he died, Jack Bogle (of Vanguard fame) said index/passive funds were too great a percentage of the market and he really knew what he was talking about! There should be a shift back towards active investment. Passive has gone too far.

April 30th 2022

I don’t want to dive too deep into the specifics of the tweet, but I did want to quickly refute what Elon says here. For the record, Jack Bogle did not say that index/passive investment funds were too great a percentage of the market. He did say that if index funds grew to the point where they made up the majority of the stock market, that could have a negative impact on the market.

This has been a debate that’s been going on for years now and the threat of a passive investing bubble has largely been debunked.

As much as index investing has grown over the past couple of decades, indexing still only accounts for around 5% of total trading volume in the markets—just a drop in the bucket. Also, the debate about what could happen if everyone indexes is a moot point because human nature won’t allow it. It’s like asking: what would happen to the fast food industry if everyone decided to eat healthy all at once?

Anyway, the larger point I wanted to get to is that whenever Elon Musk tweets about science or energy I assume he’s right because I have no expertise in those areas. But then I see a very incorrect tweet like this one where I do have a little bit of knowledge, it makes me wonder how wrong he could be about everything else.

Apparently, there’s a name for this––it’s called the Gell-Mann Amnesia effect. A term coined by author Michael Crichton, which he explains as such:

“Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them.

In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.”

I see this in my life most often when I hear national pundits talk about my beloved Utah Jazz and I’m amazed at how little they actually know about the team that I watch every single game. But then on the exact same podcast, I’ll believe every word of a rumor they spout about Joel Embiid and the 76ers.

Elon Musk’s tweet about the stock market reminded me of a quote from Morgan Housel:

“People who are exceptionally good at one thing tend to be exceptionally bad at other things, but if you’re good at one thing people will try to emulate everything you do.”

This can be a problem when it comes to personal finance because it’s one of the few industries where you can look successful without knowing what you’re talking about. You can be rich and not know a thing about money management.

This isn’t true for most areas of life. You can’t find a bodybuilder who doesn’t work out or a musician who has never practiced. The proof of work for being a legitimate bodybuilder or musician just can’t be faked. Whereas, when it comes to money you can get it in so many different ways. You can make it by being skilled in a niche profession, by being a good salesperson, a good marketer, or just by being plain lucky (i.e. family, lottery, big investment break, etc.). Then you can claim that you got your money for a completely different reason and use it as “proof” of your skill.

This is how someone who’s rich can market themselves as an investment guru without knowing much about investing.

As a general rule of thumb, you probably shouldn’t take personal finance advice from billionaires. Personal finance guru Suze Orman has made a career out of telling people to invest in the stock market. However, there was a bit of an uproar years ago when she said that the majority of her savings are actually in uber-safe bonds, and not in stocks.

She can afford to play it safe in her portfolio because she’s sold millions of books and has her own TV show.

When asked, “Do you invest in the stock market at all?” She responded, “I have a million dollars in the stock market because if I lose a million dollars, I don’t personally care.”

Elon Musk owns around $2.8 billion in Bitcoin and has said he’s cash-poor and relies on mortgages and credit day to day. Suze Orman also mentioned that she spends $300,000 to $500,000 a year on private jets. Do these sound like the people whom the majority of the country should be comparing and emulating their finances after? Of course not!

They have so much money that it doesn’t matter what they do with it. They’ll be fine either way.

I recently saw a TikTok video of a guy pitching a whole life insurance policy that had almost a million likes. With social media, there’s never been more generic, and honestly bad, financial advice out there. Be careful who you listen to.

Focus on your own circumstances and keep in mind that what may have worked for others, or what they say worked for them, may not work for you. Personal finance is personal.

Thanks for reading!