Posted on 06/23/2004 6:31:09 AM PDT by xsysmgr
Taleb’s argument is that people are often tricked, mainly by the architecture of their own brains, into thinking that things that happen at random are actually happening by design. Adam Smith, the great Scottish economist and philosopher, wrote more than two centuries ago of “the overweening conceit which the greater part of men have of their own abilities [and] their absurd presumption in their own good fortune.”>>>
This book may be about 'investing' but it really seems to be about religious faith. After all, we are all the end result of 'incredibly unlikely randomness': one recalls the old Bloom County cartoon where Bill The Cat sits around in his underwear saying "ooooooooooohh!" as he contemplates the wonderful unlikeliness of his own existence.
Fact is, either we live in a universe where things happen for a REASON or they happen at random. If they happen at random, I'm going to spend the rest of my life in orgies then commit suicide as soon as the ol' body begins to give out.... after all, what's the difference?
Of course, if I do that, and the Universe is really a place where things happen for a REASON, I'm in seeeeerious trouble.
On second thought I guess I'll put off that tour of Plato's Retreat....
While I agree with the premis, I would argue that it is chaos, not entropy.
The author's got this backwards, but I knew what he meant.
Good post; good analysis by Mr. Glassman. I think he's right. What he is saying is that it is good to be knowledgeable about stocks, to understand market trends or seeming trends -- don't count on these: Stick to your instincts. Buy stock you believe in. Sometimes you can make a good guess in prediction. But no matter, trust your instincts.
The premise is that a group will always predict outcomes better than any single expert. He says stock analysts do not perform much better than random choices, that groups of people from diverse backgrounds are superior to any single expert in making corporate decisions, and that beginners' luck has a significant role in problem solving. (I haven't finished the book so there's probably more.)
He takes a stab at why "experts" often make bad decisions; it's because they tend to follow accepted practices within their profession. A conventional failure, he states, is accepted more easily than an unconventional success. He also addresses Trends and fads like the information boom and bust.
I started reading this book half expecting that it would be a socialist screed playing to leftist populist conceits. Surprisingly, so far its anything but that; it affirms democratic institutions as more efficient and accurate, given a minimum level of fluency. The last point is important. Taken together this affirms conservative principle.
You've got to be careful about that, too: how does one select among crowds to see which are successful, and which are not? If you pick only the "successful crowds," then the comparison is a priori biased, and likely invalid.
Friedrich Hayek predicted the fall of Communism based on the premise that a few people couldn't even access, much less properly process, the amount of information inherent in an economy.
His big insight was that the free market works better, because it allows huge numbers of people to make small decisions on things they know about, and they don't have to worry about everything else. The net effect over millions of such people and decisions is that the total information in the economy is processed more optimally. That doesn't mean that lots of people don't make bad decisions (they do). It's just that more people are able to hold enough information in their heads to make small decisions, than they are for large decisions.
Smarter people, though, can make larger decisions more accurately, which is probably why there's a such a strong correlation between IQ and income.
However, individuals are less likely to make good decisions over a broad range of fields, because they don't have enough information to do so. That's where the run-of-the-mill stock analyst resides -- he doesn't really know about the business behind a stock, he just knows the transaction side of the business, and perhaps some of the short-term business aspects, but as a generalist across many, many businesses he doesn't have much more in the way real insights on the performance of individual stocks than your average person.
Moreover, there is a certain randomness to the stock business, because there is a strong element of randomness in other peoples' investment decisions. For some reason the idea of market fluctuations reminds me of how passengers' heads all move the same way when an airliner hits turbulence. Nobody's immune to the short-term random fluctuations -- it's more a question of what happens over the course of time.
The problem with the premise of this article is that it assumes that there is no way to gain that expertise. However, there are investment companies that historically do very well -- precisely because they can afford to hire people to understand small sectors of the investment world. Those companies are just as subject to random market fluctuations as anybody else, but over the long term, they've shown the ability to pick investments that can ride through the fluctuations.
It seems to me that there's little more to this article than the seed of a sound business strategy (which has already been discovered many times).
This is generally false unless the group has a clue what's going on. A group of non-medical people will do poorly in diagnosing a disease, for example. Likewise when about 50% of the people in the US do not know that the Earth goes around the Sun in once per year, such a crowd is poor at doing most scientific stuff.
In market analysis, the crown is probably fairly knowledgeable relative to the expert anyway. This is one reason for peer-review and for having committees. It's true that a single expert can miss things that a group (by virture of its varying experience) will detect.
Game theory bump.
That advice is about the same as throwing your money away in the casinos and slots. It is not "investing" it is hoping for blindman's luck -- and taxing Providence to do so.
Investing in either "Index funds" or "broadly diversified portfolios" means you personally have added no value, no benefit to the rest of us. And you do do encourage the exploiter, the fraud, the schemer, the con man, the cheat and the sly thief -- because dang it all -- they know to go were the easy money is, were the marks and suckers are.
Your post shows a lack of knowledge of what index funds are. If you invest in a fund based on the S&P index, and the S&P goes up, you make money, if it goes down, you lose money. But the fund simply invests in all the stocks of the S&P, so you are buying those stocks. The fees and commissions are often lower for this type of investment and all that is required is to get in and out of the market at the right times. (Or hold the investment long term and hope for the average of around 10%). Either way, you do add value to the market by buying and holding the shares of the companies represented by the S&P.
As far as con men, or sharks, these are people who hope you give your money to them to invest, this can be risky if the manager you give your money to is not all that good, what is just what the article is saying.
I know what index funds are, and how they work. I've worked in the fund business, I own some funds -- not index funds, though.
OK, your comments may apply better to managed funds, especially those under not so great management.
The availibility of stupid money in large quantities -- what does it do? Of course it attracts the sleaziest, the most dishonest, the schemer and the thief.
And worse -- it takes those who could work and be productive but who are drawn by the too easy "wealth", or in the worst case, as it ruins really genius and gifted people for they are embarrassed by not being as "wealthy" as their true and accurate understandings of real talent should make them -- and by fear of embarassment of being not wealthy they chase the easy money -- and by just like chasing easy women, chasing easy money ruins many a good man.
Thought y'all might enjoy this, as it has some bearing on a mutual subject of interest.
True. People's brains are configured in a way that drives them to look for patterns among the millions of events, large and small, that they encounter each day. The survival benefit of this is obvious -- learning how the world works allows you to anticipate trouble and avoid it, spot advantageous circumstances and exploit them, and predict the results of potential actions and then implement them.
(Most animal's brains can do the same thing for the same reason, just not as well as we can, since that's our superb specialty -- anyone who owns a dog can attest at how good they are at learning the tell-tale signs (e.g. patterns) which alert them to potential food, dangers, or rides in the car.)
However, because we are driven to hunt for patterns in events, we also tend to see significance even "patterns" that aren't actually there, or trust analogies even when the events being compared are only superficially similar.
This is responsible for a great deal of "what people believe that ain't actually so", and is a constant source of study among those who take an interest in epistemology ("a branch of philosophy that investigates the origin, nature, methods, and limits of human knowledge"), such as in the magazine The Skeptical Inquirer.
And as the article at the top of this thread points out, people have a strong tendency to attribute to "skill" or "planning" even those things which simply fall into the category of "s*** happens".
This reminds me of one of the funniest quotes I've run across in a long while:
"We've heard that a million monkeys at a million keyboards could produce the Complete Works of Shakespeare; now, thanks to the Internet, we know this is not true."
- Robert Wilensky, University of California
Information theory bump.
Thanks for the ping. :-)
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