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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Re: Lokicious Builds His Maginot Line (repost) Date: 11/6/2006 10:51 PM
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What the difference is between modeling financial behaviors through the use of tools like Monte Carlo engines --which a shrewd market observer like Nassim Taleb finds useful-- and the sorts of genuine testing that can be done in the in laboratories of the “hard sciences” would be interesting to explore for its getting at some of the epistemological foundations underlying this discussion that Loki and I are having.

And, hopefully, despite any appearances to the contrary, the posts by both of us in our separate threads will be interpreted by readers as a discussion. For sure, both of us are indulging in preening and posturing. The egos are huge in both cases. (Any writer has an ego, or he wouldn't write.) But the underlying issues are real, important, and they deserve attention, because decisions about them have consequences.

At the risk of putting words in his mouth and mis-characterizing his experience, he's an academic who brings to his investing that mindset. I'm a blue-collar who brings to his trading that mindset. That's two different cultures, two very different worlds. Plus, there are huge personality differences which determine how each of us perceives and deals with risk.

What I am constantly struck by, as I read the financial literature, is the prevailing assumption of investor uniformity, that "one size fits all" solutions are possible and righteous. For sure, the planners and such make a token gesture toward recognizing human diversity, but they fail miserably, because they themselves have no coherent theories of human personality. Even the excellent work being done in behavioral finance suffers from this assumption of investor uniformity. People really are very different from each other and they live in very different worlds, though they be brother and sister, or husband and wife, or planner and client. They are very different, because of the experiences, values, and beliefs each brings with them to the discussion.

My working assumption has to be that, if you think you can do, then you owe it to yourself to try. Therefore, I'm willing to push things to the limit, because in advance of bumping into that limit, I don't know where it is. That's how introverted thinkers operate. They use extraverted feeling, which is jargon term that doesn't mean what its common language equivalents suggest. In order for an introverted thinker to know what he is thinking, he has to externalize his thoughts. Once they are externalized, then they can be reviewed. “Oh”, he now says. “ I didn't know that before. And if that insight or conclusion is the case, then such and such might (or must) also be true.”

That sort of boot-strapping can drive some people crazy in the same way that someone who is used to looking inward becomes exasperated when an extrovert, who is clearly being driven in his decision-making by internal factors, denies the existence of those internal factors and claims he is being supremely rational, which the recent work in socio-biology immediately and incontrovertibly disputes. Humans are no more totally rational than our cousins, the higher primates, are totally rational. We are a few thousand generations removed from them, but, for the most part, we share with them and are governed by the same, innately hard-wired instincts. That we can, on occasion, draw a valid conclusion from obvious evidence is a small-sized miracle, much less make good decisions about anything as complex as financial markets, which, due to their constant discounting of the unknowable future are inherently complex and chaotic (but not random, though a strong streak of that runs through markets as well.)

Hence, it behooves would-be planners and investors to approach markets with a great deal of humility. Not only do we not know, for the most part, what the important facts are, even if the facts were lined up before us, we could not –-and would not— most good use of them. And if you doubt that statement, then start digging through the literature on investing and trading, particularly the interviews with successful investors and traders, especially if they are candid about their still ongoing mistakes. To a man or woman, everyone of them –-if they are honest-- will say, “I knew I was breaking my own rules when I made that mistake. I knew better than to do such and such." The good traders, the good investors, will kick themselves in the butt, then pick themselves up off the floor, put their emotions aside, and get back to work, fully knowing they will make the same mistakes again, but maybe –hopefully— catch them sooner the next time.

Loki thinks financial planning and investing share characteristics with mathematical engineering, that things can be measured with great precision and that they will perform as expected. I think planning and investing are merely practical arts, much akin to landscape painting. You're familiar, of course, with Magrite's painting: “Ceci N'est Pas Une Pipe”? or Picasso's reply to a critic: “I made a picture, nothing more.” What we do in investing and in financial planning is create pictures that have no more objective reality than daubs of colors on a canvas. By custom and training, we organize those daubs into constructs that might have real-world analogs or not. Think of the reaction of the viewing public when the Impressionists began their experiments with light. “Ugly. Awful. Incomprehensible” were the reactions. Now, those experiments are what untrained viewers think of as “art.” We enjoy being fooled by such artifice.

Discussions of financial matters can have –-should have-- such tentativeness. Who knows where the truth really lies in matters of history and finance, whose telling creates it own frame and interpretation? Yes, bills have to be paid and food put on the table, both this year and forty years into the future. But there is also much about finance that lends itself to purely psychological self-exploration. Why do each of us fear some things and hope for others? How do those emotions get translated into action? Personal finance isn't a branch of mathematical engineering. It's an intersection of philosophy, psychology, socio-biology, and theatre.

Make a few bucks and have a bit of fun.(And, sometimes, fun is making big bucks.) But don't take any of this stuff too seriously. “In the long run”, as Keynes famously said, "we all are dead.”

Charlie

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