Much of that rhetoric has quietened after this year’s crash, which has wiped nearly $US2 trillion ($3.14 trillion) off the cryptocurrency market. But the pain felt by everyday retail investors who bought into the hype and risked (and lost) their savings remains real. Go online to Reddit forums and one can read stories posted by real people describing their investment in crypto as the biggest mistake of their life.
Story after story shows ordinary people glimpsing financial freedom, only for it all to vanish in a matter of hours during the crash. At one point during the market collapse this year, the top-voted post in the Reddit cryptocurrency forum was a link to a suicide prevention hotline.
In a recent podcast with psychologist Steven Pinker, respected 98-year-old investor Charlie Munger says the biggest mistakes he has made in his long career were born out of wishful thinking.
Wishful thinking is the bias we succumb to when we are unable to separate what we want to be true from what actually is true and what is rational according to the evidence we have in front of us. At its core, wishful thinking is an inability to deal with reality as it is and an unwillingness to update our beliefs when new evidence emerges.
In financial bubbles, the wishful thinking of a single investor multiplies. When we invest in an asset or industry with all of our friends, and we all want the same investment to succeed, wishful thinking dovetails with conformity, creating what I call “wishful groupthink”. When wishful groupthink is infused with politics and ideology, it becomes cult-like, impervious to reason and impervious to new evidence.
The cryptocurrency bubble is one of many examples of wishful groupthink. Another is the overwhelming hype associated with renewable energy technologies, specifically wind and solar. While the scaling up of such projects in Australia is remarkable – and the increasing output of clean energy impressive – much of the ideological rhetoric remains overcooked, overhyped and downright irresponsible.
It is claimed by Climate Change and Energy Minister Chris Bowen and the teal independent MPs that renewable energies will a) reduce emissions and b) make Australia a “renewable energy superpower” while c) creating jobs and d) lowering power bills – all at the same time. It would be nice if this were true. And it is understandable that many people want this to be true. But reality has a way of making itself known, and much of this hype eventually will lead to pain.
The claim that the renewable energy industry will create a surplus of jobs (notwithstanding those jobs that will be lost when coalmines shut) lacks specificity. The assumption seems to be that once coalmines close, miners who may be used to living in one location, with families and community connections, suddenly will want to move from place to place as itinerant construction workers. Of course, this might happen. But it is by no means guaranteed. In reality, this is a risky bet. But our government presents it as a sure thing.
While the claims about job creation seem overhyped, the assertions that solar and wind will lower our electricity prices are far more irresponsible. It is true that renewable energy is cheap on sunny and windy days. But it is also true that on such days wind farms and solar panels deliver excess energy that stresses the electricity grid.
The 2016 blackout in South Australia was found to be caused partially by the shutdown of the state’s wind farms due to volatile weather, in particular excessive wind. So while solar and wind can deliver abundant energy at certain times, and while this abundant energy may be cheap, the mistake is to assume this translates into cheaper energy bills. It doesn’t because when the overall system is stressed, more intervention is needed, and more intervention naturally leads to higher prices. How could it not?
But what about batteries? Batteries are great, but they need to be built before we can use them and almost every country is scrambling to build batteries at the same time. This demand drives up prices. The idea that such costs will never be passed on to the consumer is fanciful.
Many claims about renewables, as with cryptocurrencies, sound grand in theory. String a few abstract concepts together, sprinkle with jargon, marinate in ideology and boom, a claim can sound plausible to the untrained listener. And while it may be true that we need to transition to renewables to meet our net-zero obligations, and that we can scale up solar and wind rapidly with enough government subsidy, this by no means guarantees cheaper power prices for consumers or ensures jobs for those bearing the brunt of the transition.
It would be better if our leaders, and the Energy Minister in particular, were honest with Australians about the pain and hardship our energy transition will bring. Given that the public is overwhelmingly supportive of action on climate change, this would be real leadership, which might be rewarded by the electorate. But concealing the difficulty and engaging in wishful thinking will lead only to more shock and anger down the track when promised outcomes fail to materialise.
As Munger says, to be rational we need to “recognise reality even when you don’t like it – especially when you don’t like it”.
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This time last year one bitcoin was worth more than $98,000. Today it is worth just more than $32,000, a 60 per cent decrease in 12 months. If you were around or were involved with cryptocurrency communities a year ago, it was common to see and hear vainglorious claims about the potential of bitcoin to replace the US dollar, revolutionise the financial industry and save the world.