Why we're on a collision-course with crisis

Life is full of examples where folks make bad choices for noble reasons. Not every decision is a winner: sometimes you make the right call, sometimes you don't.

• In 1962, Decca Records passed on signing a young new band because it thought that guitar-based groups were falling out of favor. That band was The Beatles.
• Napolean Bonaparte calculated he could conquer Russia by assembling one of the largest invading forces the world has ever seen. He marched towards Moscow in the summer of 1812 with over 650,000 troops. Less than six months later, he retreated in failure, his forces decimated down to a mere 27,000 effective soldiers.
• 1985 217 separate investors turned down an entrepreneur trying to raise the relatively modest sum of $1.6 million to fund his vision of transforming a daily routine shared by millions around the world. That company? Starbucks.

In these cases, those making the decision made what they felt was the best choice given the information available to them at the time. That's completely understandable and defensible. Fate is fickle, and no one is 100% right 100% of the time.

But what's much harder to condone -- and this is the focus of this article -- is when people embrace the wrong decision even when they have ample evidence and comprehension that doing so runs counter to their welfare.

Really? you might be skeptically thinking. Do people really ever do this?

Yes, sadly. Absolutely they do.

Because decision-making isn't just based on data. It's also influenced by beliefs. And when our beliefs don't align with the data, we humans can be woefully stubborn against changing our behavior, even in spite of mounting evidence that our beliefs are incorrect and possibly even detrimental to us.

The fascinating field of behavioral economics is dedicated to studying why people are capable of making bad decisions despite have access to good data (if you've got the time, listen to our past interviews with behavioral economist Dan Ariely here. They're riveting.)

So, yes, we humans are easily capable of being our own worst enemies.

For a prime example, let's turn to one of the greatest basketball players of all time.

The Curious Case Of Wilt Chamberlain's Free Throws

On a long drive I took recently, I listened to a podcast produced by Malcolm Gladwell, author of The Tipping Point as well as a number of other intellectually enjoyable human interest books.

Gladwell's podcast tackled this same topic of Why do smart people make dumb decisions?, and it featured Wilt Chamberlain's free throw career to make its point.

Wilt Chamberlain is widely cited as the best forward to ever play the game of basketball. At 7' 1" and 275 pounds, with a ferocious attitude and athletic grace, he was a dominating force on the court during the 1960-70s. He won seven scoring titles, including the game he is best known for in which he single-handedly scored 100 points -- a record that still stands today.

That record 100-point game is even more interesting than most people realize, Gladwell points out. It's significant not just for the total number of points that Chamberlain scored, but also for the number of free throws that he made during the game: 28.

Chamberlain was on fire with his free throws that night. He made 88% of them (28 of 32). That's a very high percentage versus the league average, and amazingly high given Chamberlain's career average of roughly 50%.

In fact, Chamberlain was widely regarded as a horrible free throw shooter. His overall stats certainly say he was, but this short video clip below does an even better job of hitting home how poorly he typically shot from the line:

So how did Chamberlain's free throw conversion get so much better?

To answer that, we need to look at another basketball great...

Rick Barry & The 'Granny Shot'

A contemporary of Wilt Chamberlain was Rick Barry, who played much of his career for the Golden State Warriors. Barry was a phenomenal free-throw shooter -- at the time he played he was the best in history.

His career percentage? 90%

That's over a 15-year pro career. Amazing. (His best year was in 1979 when he completed a freakishly high 94.7% of his shots from the line).

Why was Barry so successful at free throws? Why was he so much better than Wilt?

He shot his free throws underhanded.

Yep, that's right. This 12-time NBA all-star made 'granny shots'.

Barry approached the free throw as a physics problem, and had a willingness to "do whatever it takes" to improve his accuracy and precision:

"Physicists have done all kinds of testing and said it's the most efficient way to shoot because there are fewer moving parts. It's so much more natural to shoot this way," he says. "Who walks around with their hands over their head?"

As Barry has often explained, the primary benefits of Granny style are that it increases the likelihood of a straight toss, and it produces a much softer landing on the rim. [Shooting underhand] is also able to generate more backspin, which gives him more breaks on errant throws.

Here's a clip of Barry in action:

He didn't always shoot this way. Barry started as an overhand shooter like everybody else. But when he realized that his completion percentage improved by adopting the underhand toss, he switched over and the rest is NBA history.

Which brings us back to Chamberlain.

As a notoriously bad foul-line shooter, Chamberlain was advised to adopt the granny shot. He did, and his free throw percentage soon rose to a career high 61% in 1961-62, the same season as his famous 100-point game. So, the change worked. His stats improved, his team won more games, and his amazing consistency helped him set a single-game scoring record that remains untouchable to this day.

But then something unexpected happened: Chamberlain stopped shooting underhanded.

Making The Wrong Choices For The Wrong Reasons

When Wilt gave up the granny shot, his free throw percentage proceeded to decline, plummeting to a career low of just 38% by the 1967-68 season.

So, the big question here is: Why? Why would Chamberlain willingly abandon a superior form of shooting, especially when he had already experienced direct personal gain from its benefits?

The answer goes back to beliefs: he felt "like a sissy" shooting that way.

Sure, in the early days of the NBA, underhanded foul shots were common. But by the time of Chamberlain's career, pretty much only female basketball players shot that way anymore.

Given the machismo of professional sports, it's understandable that a star like Wilt cared what the other guys thought of him. But was it important enough to abandon a solution that improved his quality of play so much? After all, isn't the most respected teammate the one who can be counted on to put the most points on the board?

Gladwell notes that it has been estimated that Chamberlain could have scored over 1,000 additional points in his career had he shot underhand from the foul line throughout.

In addition to that, he likely would have scored even more points by playing more minutes. Because he was such a poor free thrower, Wilt was often benched in the final minutes of play during close games -- as a poor foul shooter is a big liability under those conditions. The opposing team can foul him with confidence that he'll miss his shots and they'll then get possession of the ball.

Gladwell marvels that somebody so driven to win would deliberately abandon such an easy and advantageous solution as Chamberlain did the granny shot. Even after he had personally experienced its superiority. But he did, thus proving how belief can trump reason.

Later, in his autobiography Wilt: Larger Than Life, Chamberlain admits that switching back to an overhanded free throw was a clear mistake:

"I felt silly, like a sissy, shooting underhanded. I know I was wrong. I know some of the best foul shooters in history shot that way. Even now, the best one in the NBA, Rick Barry, shoots underhanded. I just couldn't do it."

What's amazing is that even though both Rick Barry and Wilt Chamberlain very visibly demonstrated the advantages of the underhanded free throw, half a century later almost nobody -- not in the NBA and not in college ball -- has adopted it. Think of all the additional points that could have been scored over that time, all the additional minutes played, all the additional team wins. It's not like players haven't had a powerful incentive to consider changing their behavior -- these are the very stats their contracts are based on. In great likelihood, many $millions ($billions?) of additional player compensation have been forfeited over the past 50 years simply because the athletes didn't want to look a tiny bit 'girly' at the line.

Later on in his podcast, Gladwell concludes that Chamberlain -- like virtually everbody else in professional basketball -- had a high threshold for overcoming conventional opinion. He wasn't comfortable being a maverick when it came to bucking social mores. Rick Barry, on the other hand, clearly had a lower threshold -- famously not caring what others thought of him (Barry was widely disliked across the league for his disregard of other's feelings).

He ends the podcast with this observation:

I know we've really only been talking about basketball, which is just a game in the end. But the lesson here is much bigger than that. It takes courage to be good, social courage, to be honest with yourself, to do things the right way.

A Lack Of Courage To Be Good & Honest

Which brings us back to the point of this article. Chamberlain's willful blindness to the ramifications of his clearly inferior choice is not unique. In fact, when we look at many of the decisions being made by world leaders in recent years, we see a depressing abundance of intentional bad choices.

Most emblematic of this, in my opinion, are the ZIRP/NIRP interest rate policies the world's central banks are implementing. As discussed many times here at PeakProsperity.com, the endgame of these policies is easy to predict. History is replete with examples of similar attempts of governments attempting to print their way to prosperity. It's simply not possible. As Chris says, if it were, the Romans would have figured it out and today we'd all be speaking Latin.

The head central bankers are not morons (although a number of them may indeed be ivory tower academics too out-of-touch with the real world). Many of them realize that they have painted themselves into a corner by easing too much for too long, by flooding the world with too much cheap debt-based money. Many understand, perhaps today more than ever, Ludwig von Mises' rule that:

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."

But, like Chamberlain, they do not have the courage to re-evaluate their beliefs and chart an alternative course.

To 'voluntarily abandon further credit expansion' means letting natural market forces bring down stock, bond and real estate prices from their current bubble highs -- thereby vaporizing a lot of paper wealth. It means widespread layoffs as inefficient companies that have been kept alive by nearly free access to nearly unlimited credit have to start actually generating profits if they can. It means living below our means today, so that we can sustainably live within them tomorrow.

Instead, they simply double down on the policies that got us into this mess in the first place, claiming that their efforts to date just haven't been big enough yet to succeed. And they do this with the full support of our politicians, who want to avoid any unpopular austerity measures because they care much more about getting re-elected than the hard work of actually addressing our nation's structural problems. So interest rates go even lower, asset bubbles grow even higher, the wealth gap extends even wider, and the risks of a "total catastrophe of the currency system" become even more extreme.

The coming economic/financial/monetary reckoning can't be avoided at this point; only managed. But we can't position ourselves to manage it gracefully if we don't have to courage to even recognize its existence. And our current leaders do not have that courage.

Which is why we need to ready ourselves, as individuals. Charles Hugh Smith recently penned an excellent report Investing For Crisis which is an essential read for any investor who shares the concern that we will continue to see more wrong choices being made for the wrong reasons -- until the entire systems fails. If you haven't read it yet, you really should.

Click here to read Charles' Investing For Crisis report (free executive summary, enrollment required for full access)