The Ingenuity Discount

November 09, 2022
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People like to make forecasts. Predictions. Models. It’s quite easy to make a prediction seem plausible. We all try to think logically. If events A and B occur, then C will be the result. But we’re poorly equipped to estimate the impact of another variable on the outcome. Adding one variable can change everything. We often fail to intuit this.

Sniping provides an interesting example. The mathematicians of the battlefield. Numerous variables must be accounted for – distance, elevation, wind, altitude, precipitation…. Those all make sense. Then you have the Coriolis effect. That is, the earth’s rotation. A variable easily forgotten. The earth rotates from West to East on its axis, and the bullet leaves the surface of the earth once fired. The Earth continues rotating, but the bullet doesn’t. If the shooter is shooting West, the target will rotate up and towards the shooter, causing the bullet to impact slightly lower. If the shooter is facing East, the target will rotate down and away, causing the bullet to impact slightly higher.[i] At 1,000+ yards, the Coriolis Effect can cause the bullet to miss its target by inches. The difference between a hit and a miss. One small, often forgotten variable. Completely different result. 

Market forecasters and economists love making predictions. Particularly predictions of doom. The apocalypse du jour. You see them plastered across the internet and hear them repeated by talking heads. One variable you’ll often see missing - how people will respond. Impossible to predict, so that variable is never included in their models. But impending catastrophe creates incentives. An incentive to provide a solution. In a free market economy, providing a solution to a catastrophe will make you rich. So you’ll do it. Or someone else will. They won’t lament the coming apocalypse. They’ll do something about it. Those predicting the coming apocalypse du jour discount human ingenuity. It is the critical variable absent in their model. Of course, if they possessed the ingenuity, they wouldn’t be forecasting doom. They’d be busy getting rich providing the solution.

Thomas Malthus was a pioneer victim of the Ingenuity Discount. In 1798 he wrote An Essay on the Principle of Population in which he presented a logical, coherent thesis: the human population grows exponentially, and our food supply grows linearly. This will create a “population trap” in which we have too many people and too little food. The population bomb’s inexorable shockwave will lead to famine, war, and death. Disaster.

Malthus’s first premise was correct. The human population did increase exponentially. The global population at the time was about 800 million. It’s 2022 we’re at about eight billion. A 900% increase over the last 224 years. His second premise was more of an observation. The food supply grows linearly. To grow more food, we need more farmland. There’s only so much land out there. We can’t make more of it.

A simple observation no one disagreed with.

And dead wrong.

Malthus forgot the most important variable: human ingenuity. His prediction premised on self-evident phenomena failed spectacularly. He fell prey to the Ingenuity Discount.

In the 1800s, each farmer grew enough food to feed about three people per year. 90% of Americans lived on farms. By 1995, each farmer grew enough food 128 people per year and only 1% of America’s population lived on farms.[ii] We didn’t create more land. We created new methods to increase yield per acre. Principally, fertilizer. The machinery of the industrial revolution helped too. Malthus couldn’t imagine fertilizer exponentially increasing crop yields and giant John Deere tractors helping with the harvest. Humans adapted and invented. The Ingenuity Discount made his models worth less than the parchment on which they were written.  

The same dynamics were at play with the “peak oil” narrative. Jimmy Carter gave an address in 1977 in which he said, “the world now uses 60 million barrels of oil a day and demand increases each year by 5%. This means that just to stay even we need the production of a new Texas every year, an Alaskan North Slope every nine months, or a new Saudi Arabia every three years. Obviously, this cannot continue.”[iii]

It turns out it can continue. Presidents fall prey to the Ingenuity Discount as well. Carter was right that the demand for oil would grow.

But we didn’t need to discover a new Saudi Arabia to quench the world’s thirst for oil. We simply came up with new ways to pull oil from the ground, principally hydraulic fracturing. As of 2019, 59% of America’s crude oil was produced by fracking. A technology still in its infancy. Worldwide it is estimated the invention of fracking has opened up an additional 140 billion barrels of oil that were previously inaccessible.[iv] Today, the only limitations on oil are political. Every peak oil prediction turned out to wrong because every peak oil prediction suffered from the Ingenuity Discount. 

The peak oil narrative debunked, oil’s projected negative impact on the climate has become the new apocalypse du jour. The new narrative states that fossil fuels generate carbon emissions which contribute to the warming of the globe. You’ve heard all the dire predictions. The world will end in 12 years. I’m not going to comment on the validity of these predictions or climate modelling writ large. I simply wish to point out that nearly every one of those predictions suffers from the Ingenuity Discount. Remember electric cars 20 years ago? Of course you don’t. They didn’t exist. Then Elon Musk showed up and now everyone wants one. Not a single climate model from twenty years ago incorporated the advent of electric cars let alone the fact that everyone would want one.

Predictions of catastrophe. The apocalypse du jour. A few more I’ve heard recently…

The world is transitioning from oil to electric energy. Electricity is stored in batteries which are created using rare-earth metals (lithium, cobalt, etc.). And China owns all the lithium mines! Ipso facto, we’ll soon be wholly reliant on our geopolitical rival for our energy needs. That sounds bad. It may be true – I know little of the global dispersion and ownership of rare earth minerals needed for batteries. But I do know that prediction suffers from the Ingenuity Discount. Let’s say it turns out to be true. In the future China owns all the rare earth materials needed for batteries just at the point where our entire economy runs on battery-powered electricity. You may think your time will be better spent learning Mandarin than reading this blog post. The Ingenuity Discount says otherwise. I suspect it is more likely someone discovers an alternative energy source (actually we already have – nuclear). Perhaps a form of energy we’ve never heard of. Maybe a new way to mine lithium that exponentially increases our ability to extract it. If the ingenuity were mine, I wouldn’t be writing these blog posts. I’d be preparing to get rich.

Another prediction that has gained considerable traction recently is coming food shortages. The war in Ukraine being the proximate cause given the country’s massive global share of wheat, barley, corn, and fertilizer production. Wait until the harvest this fall and good finding food at the grocery store. A reasonable conclusion given the premises. But I see no adjustment for human ingenuity. It has been said there are only nine meals between mankind and anarchy. If there are food shortages coming down the pike, someone is going to become wealthy offering a solution. Will there be temporary shortages of some items much like we’ve seen with automobiles lately? That certainly seems possible. Will there be millions of Americans scouring the countryside for food? The Ingenuity Discount says likely not.

Pessimistic predictions are everywhere. They always have been, and they always will be. Morgan Housel says an optimist sounds like a sales pitch, while a pessimist sounds like someone trying to help.[v] The Ingenuity Discount stipulates every prediction is fundamentally flawed. But these predictions do have a very real impact on the stock market. Predictions of doom create fear, and fear causes people to sell their stocks as they chase the illusion of safety in cash. This creates an opportunity. The Ingenuity Discount indicates those predictions causing the market to fall and $1.99 will buy a cup of coffee at Starbucks. We’ll happily buy into the stock market at bargain prices.

Why worry about the market’s response to the coming doom if you know the doomsayer’s predicate model is fundamentally flawed?  

People say necessity is the mother of invention.

They’re right.

Sean Cawley, CFP®


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Content here is for illustrative and educational purposes only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously.

This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.





[v] Housel, Morgan. The Psychology of Money. Harriman House, 2020. Pg. 175.