Please note that for the purposes of this analysis, I use the Eric Steinberg edition of Hume’s An Enquiry Concerning Human Understanding. Please refer to past analyses (On Experience and On Custom) for background.
In Section X of his An Enquiry Concerning Human Understanding, entitled “Of Miracles,” Hume argues that there is no compelling reason to believe in miracles, and certainly not to consider them foundational to religion. As an empiricist, Hume asserted that because one’s knowledge of miracles derives exclusively from the testimony of others who claim to have seen miracles, this secondhand testimony is less reliable than one’s own experience, which tells oneself the contrary. Belief, Hume asserts, should be proportioned to evidence. My argument is no way meant to be a religious commentary of any form, but to apply Hume’s critique to that of asset bubbles in financial markets.
Hume begins his critique of miracles from an empirical and historical perspective. Empirically, Hume argues that miracles are suspect for they defying sufficient reason. Belief, Hume asserts, should be proportioned to evidence; miracles defy the most reliable evidence. Hume states that “A miracle is a violation of the laws of nature; and as a firm and unaltered experience has established these laws, the proof against a miracle, from the very nature of the fact, is as entire as any argument from experience can possibly be imagined” (Section X, Part I). Miracles, for Hume, are suspicious because their very claim and context defy all of the evidence that observation tells us about the world, namely the laws of nature. Therefore, they can only be credible to the extent to which the testimony in its favor is more forceful than the laws of nature that contradict it. Similarly for investors, asset bubbles defy the ‘laws’ of financial theory; in bubbles, business’ market prices grossly outpacing their underlying fundamental prospects.
Hume believed that those cases where all evidence points to one particular conclusion, one can be almost certain that that conclusion is correct. However, when there is evidence both for and against a certain conclusion, one can regard that conclusion only with a certain degree of probability, to the extent to which the evidence for it outweighs the evidence against it. For miracles, the evidence for them is very insufficient, Hume writes:
“For first, there is not to be found, in all history, any miracle attested by a sufficient number of men, of such unquestioned good-sense, education, and learning, as to secure us against all delusion in themselves; of such undoubted integrity, as to place them beyond all suspicion of any design to deceive others” (Section X, Part II).
No miracle is supported by testimony of a sufficient number of trustworthy people to rule out the possibility of falsehood, Hume asserts. For investors, all of our experience tells us that not only are asset bubbles contradictory to common sense and reason, but that empirically speaking, times of egregiously high market valuations have never been sustained over the long-run before.
Hume argues that miracles rest on the sensations of surprise and wonder. These sentiments, Hume argues, often lead us to unreasonable beliefs, which diverge from our most reliable evidence, namely our experience. Hume writes:
“the passion of surprise and wonder, arising from miracles, being an agreeable emotion, gives a sensible tendency towards the belief of those events, from which it is derived. And this goes so far, that even those who cannot enjoy this pleasure immediately, nor can take those miraculous events, of which they are informed, yet love to partake of the satisfaction at second-hand or by rebound, and place pride and delight in exciting the admiration of others” (Section X, Part II).
Hume argues that there are countless instances of tall tales of all sorts that stem not from reasonable inquiry but from a love of wonder. Therefore, the passions are the crux of one’s belief in miracles. For investors, this application is clear for the formation of asset bubbles, where the passions of greed and faith, where faith is a substitute for reason, are central. Hume aptly points out that even those who are secondary to accounts of miracles still share in a sense of wonder and excitement for these events. Similarly, bubbles form not only from those who participate in the direct bubble, but many of those on the outside get sucked in by the apparent success and wonder of those in the bubble. Rising asset prices give the illusion of validation and success, and this excites the masses, who turn a jealous or anxious eye toward these speculative happenings.
Hume asserts that no testimony can ever count as a probability, let alone a proof, of the existence of miracles. All testimony in favor of miracles is based in experience, and this same experience opposes this testimony with contrary testimony and with the laws of nature. Hume writes:
“A religionist may be an enthusiast, and imagine he sees what has no reality: He may know his narrative to be false, and yet preserve it, with the best of intentions in the world, for the sake of promoting so holy a cause: Or even where this delusion has no place, vanity, excited by so strong a temptation, operates on him more powerfully than on the rest of mankind in any other circumstances” (Section X, Part II).
Hume implies that religion is based in faith, not in reason. There is no rational ground for trusting in miracles unless one is there to witness on firsthand. Moreover, those who purport the validity of miracles may be doing so with the best intentions of religious fervor, but because miracles play on the passions, they are very strong for the average man to resist. For investors, asset bubbles can be started by a wide variety of speculative individuals. Some are so hoodwinked by technologies or particular products that they genuinely dupe themselves into putting full faith before any reason. They profess that it is different this time, and that their hopes and dreams will come true. Others are simply too arrogant and vain to admit that their success is not the result of pure speculation. Rather, they assert that they know that such absurd valuations are justified, despite no rational justification for it.
Hume says that miracles, when they are read about in the books of histories, are easily spotted for their absurdities. Hume writes:
“The many instances of forged miracles, and prophecies, and supernatural events, which, in all ages, have either been detected by contrary evidence, or which detect themselves by their absurdity, prove sufficiently the strong propensity of mankind to the extraordinary and the marvelous, and ought reasonably to beget suspicion against all relationships of this kind” (Section X, Part II).
However, Hume asserts that there are people who maintain that miracles exist to this day. Hume says that “It is strange, a judicious reader is apt to say, upon perusal of these wonderful historians, that such prodigious events never happen in our days. But it is nothing strange, I hope, that men should lie in all ages” (Section X, Part II). Because the passions persist throughout all ages, there will always be lies, Hume implies. For investors, we read about bubbles and are baffled that such stupidity could ever occur. Bubbles are clearly spotted with the 20/20 vision of hindsight. It is much harder, though certainly not impossible, to identify bubbles when they are in their initial and early phases. Therefore, we are less prone to think of them in our current times, and we merely regard such phenomena as historical artifacts, which ignores the fact that human nature has not changed over history. Therefore, the seeds of the next bubble are always in place and being watered somewhere because some, if not most, humans will always be speculative in their endeavors.
Hume argues that miracles appear to be even more frivolous when they originate from non-orthodox sources, for they cannot rely on the authority of the credible existent institutions. Given this, these claims ought to be treated with even more suspicion. Hume posits:
“But should this miracle be ascribed to any new system of religion; men, in all ages, have been so much imposed on by ridiculous stories of that kind, that this very circumstance would not be a full proof of a cheat, and sufficient, with all men of sense, not only to make them reject the fact, but even reject it without farther examination” (Section X, Part II).
Hume uses this example to argue that no testimony, whatsoever, can ever count as a probability, let alone a proof, of the existence of miracles. Hume’s psychology of miracles points out that the more believable miracles rest on some authority, even though it is still misconstrued. Similarly, bubbles are even more speculative when they are not even predicated on fundamentals, such as GAAP measures. When new measures of ‘value’ are purported, such as certain Non-GAAP measures or even more speculative measures such as Price per (Adjusted Pro Forma) Clicks/Tweets, like Hume’s ‘men of sense,’ one ought to throw out such measures immediately, so as not to waste any more of their time.
Nevertheless, when miracles are said to occur, Hume writes that they are tricky to remedy. Miracles appeal to grounds that are said to be above reason and observation, so those who are to judge their credibility are put in a peculiar position. Hume writes:
“His auditors may not have, and commonly have not, sufficient judgment to canvass his evidence: What judgment they have, they renounce by principle, in these sublime and mysterious subjects: Or if they were ever so willing to employ it [judgment], passion and a heated imagination disturb the regularity of its operations. Their credulity increases his impotence: And his impudence overpowers their credulity” (Section X, Part II).
The judgement of miracles is complicated because miracles play on the passions. When these appeals are made with eloquence, reason is confounded. Hume states that “Eloquence, what at its highest pitch, leaves little room for reason or reflection; but addressing itself entirely to the fancy or affections, captivates the willing hearers, and subdues their understanding” (Section X, Part II). For investors, it is difficult to convince those not under the spell of bubbles of their speculation. The investor can point to history and show that such asset values are never sustainable, but the ardent speculator will protest, stating that it is obviously different this time. They rest their faith on unreasonable assessments of the internet and social media, stating that reason cannot grasp their potential. When faced with such statements of passion (and might I add, stupidity), the investor ought to, like “The wise lend a very academic faith to every report which favors the passion of the reporter” (Section X, Part II).
Hume aptly points out that miracles are not only promoted by those who are filled with religious fervor, but that they spread because of the passions of greed and wonder that exist in the average man. Hume writes that “The smallest spark may here kindle into the greatest flame; because the materials are always prepared for it. The avidum genus auricularum, the gazing populace, receive greedily, without examination, whatever soothes superstition, and promotes wonder” (Section X, Part II). Asset bubbles, I assert, follow Hume’s discussion. A small spark can ignite a large bubble for bubbles do not rise from the assets themselves, but rise from a widespread “risk-on” attitude – a race to the bottom – that pushes asset prices unreasonably up. For the speculative masses are greedy; they care only for the ends and are not willing to consider the best means to achieve it. They intentionally ignore the warnings and they disregard their conscious. As Hume points out, they do not examine the evidence presented to then, for they seek only that which reaffirms their desires and thereby they act without thought.
Miracles are a direct contradiction of the laws of nature, which one also infers from experience. Thus, experience provides us both with evidence for and evidence against miracles, and there is nothing beyond experience that can inform one’s judgment. One must then determine which judgment experience renders more likely. Hume writes:
“It is experience only, which gives authority to human testimony; and it is the same experience, which assures us of the laws of nature. When, therefore, these two kinds of experience are contrary, we have nothing to do but to subtract the one from the other, and embrace an opinion, either on one side or the other, which the assurance which arises from the remainder” (Section X, Part II).
Hume suggests that experience has taught us to hold the laws of nature as most certain and indubitable. On the other hand, one often finds human testimony to be mistaken, especially when dealing with supernatural matters, thereby further rendering miracles on suspect grounds. For investors, Hume’s laws of nature are akin to reversion to the mean. When presented with conflicting views, one ought to use reason and experience to inform us that things revert to the mean, and that speculative endeavors, which include excessive optimism and pessimism, are not the norm and do not last. Therefore, when one subtracts the side with the least evidence from the side with the most, one has more confidence in the remainder.