I suspect, though, that this doesn't show the flaws in libertarianism so much as the dangers of motivated reasoning - our tendency to expect to see what we want to see. So, for example, people who distrusted governments to control the money stock or inflation bought assets that were free from state control, in the belief that these would survive governments' debasement of their currencies. Unfortunately, such assets have been debased by market forces.
Motivated reasoning is, however, not confined to libertarians. I fear some critics of the government's fiscal austerity are too pessimistic about the prospects of recovery while some supporters are too optimistic. On both sides, politics colours investment decisions.
This mistake can, in its more extreme form, be magnified by another - the tendency to expect clean, dramatic evidence to vindicate our beliefs. Just as some holders of gold expected high inflation to prove their distrust of fiat money correct, so the more fanatical of George Osborne's critics and opponents have expected a sharp recession or vigorous recovery to prove them right.
But in the social sciences, evidence rarely works like this. It is instead ambiguous and messy. The fact that we're still arguing about Lady Thatcher's legacy tells us this. And even if decisive evidence does arrive, it often does so late. Yes, the collapse of the Soviet Union proved that centrally planned economies don't work. But it took 80 years for this to happen, during which time many intelligent people were misled into thinking such economies were sustainable.
However, motivated reasoning doesn't just exist in people with political agendas, as a nice experiment by Guy Mayraz of the University of Melbourne has shown. He got people to predict the price of wheat, based upon charts of historic prices. Before doing so, he randomly assigned them to one of two groups: farmers, who were paid more if the price was high; and bakers, who gained from a low price. How found that farmers expected higher prices than bakers, even when both groups were paid more if they made more accurate predictions and even though both had identical information. This shows how easily it is to fall into the trap of wishful thinking. We like to think that our investment positions are based upon our reasoning, but it's possible that the positions themselves shape our thinking.
As libertarians have found, such motivated reasoning can be expensive. So how can we avoid it?
The answer is: with great difficulty, because it is buttressed by several other cognitive biases. These include: the self-serving bias, our tendency to think we're cleverer than we are; the optimism bias, the belief that things will turn out alright; and the confirmation bias, our tendency to overweight evidence that we are right and to underweight or ignore evidence we are wrong.
The thing is, these biases are very often useful. They motivate us to go to university, go for good jobs or to start new businesses. It's just that they let us down sometimes.
The solution here, if there is one, lies in two tricks. First, we should ask of any big position we have: why might I be wrong? If you actively look for evidence you might be wrong, you'll be doing something to counteract wishful thinking.
Secondly, don't fall into the error of base rate neglect, and remember background probabilities. These tell us that: returns are largely unpredictable; that the sort of big evidence that would vindicate a big out-of-consensus position is rare, and its timely appearance even rarer; and that people often pay too much for the probability of big wins.
Only fanatics expect things to turn out entirely in their favour.
