Hi Guys,
My wife and I just completed a two week Canadian cruise on the Holland American Line. We traveled on the MS Maasdam. We cruised eastward on the St. Lawrence River and down the US Atlantic coastline from Montreal to Fort Lauderdale. We satisfied one of our bucket list goals to visit Montreal, Quebec, and Halifax. The cruise itinerary supplemented those attractive ports with stopovers at lesser Canadian towns like Saguernay, Bale-Comeau, Gaspe, Charlottetown, Sydney, and Saint John. Each of these lesser anchorages gave further insights into the beauty of the Canadian coastal landmass, and the energy, resourcefulness, and persistence of the Canadian spirit.
For the most part, cod have vanished and minerals have been overly extracted from the Nova Scotia waters and landmass. Although fishing and mining have become more iffy propositions for our northern neighbors, these practical people have economically survived, some even prospered. They now actively seek our tourist dollars. At these smaller port stops, each community went the extra mile to provide a friendly welcome. That effort was typically anchored by well organized and enthusiastic female clubs. The welcome parties were often accompanied with ubiquitous hot coffee and basketfuls of amazingly innovative cookies.
We had the privilege and pleasure of encountering many fine Canadian citizens who were uniformly helpful, genuine, and a treat to meet. There was a Canadian Navy officer who walked US military battlefields to gain a close perspective of their challenges and hardships, a random citizen who personally guided us up a maze of escalators to scale a steep hill in Saint John, several Occupy Wall Street-lite protestors who were clean, polite, and well spoken, but wrong about the functioning of our capitalistic economic system. All of these brief contacts were stimulating finds. We enjoyed all of them. and many more, both on and off the ship.
Local artists, poets, and song writers like Gordon Lightfoot, Ian Tyson, and Stan Rogers captured the spirit and subtle feelings of the Candian experience in many of their soul-probing songs. Canadian’s love to sing, to dance, to drink, and to celebrate in a Ceilidh (a traditional Gaelic kitchen party gathering). We participated in a rousing Ceilidh that will forever be a memorable highlight of our Cape Briton trip.
I always attempt to exploit these exceptional experiences into some financial lessons learned that will better inform my mutual fund investment philosophy. Two books that I read on the trip assisted in that transfer process.
The books are Gladwell’s “Outliers” and Lehrer’s “How We Decide”. Incorporating some of the experiences and lessons learned from our cruise into the framework of the behavioral, uncertainty, emotional, and complexity considerations outlined in these two books will enhance my decision making abilities and should contribute to making me a more disciplined mutual fund investor. Here is a summary of some of the principles and rules developed in the Gladwell and Lehrer volumes. You might also benefit from them.
“Outliers: The Story of Success” is a 2008 book written by Malcolm Gladwell, the author of the hugely successful “The Tipping Point”. A recurring theme that appears throughout the text is the "10,000-Hour Rule", an observation originally formulated by researcher Anders Ericsson. The takeaway from that rule is that fund managers need at least 5-years of concrete experience before they can become competent, perhaps skillful, managers.
Gladwell proposes that genius is not the only factor that contributes to a person's success; he emphasizes that numerous other factors are major elements. For example, Gladwell argues that Robert Oppenheimer, of Atomic Bomb fame, benefited from an affluent background that helped grant him the skills necessary to become successful.
Gladwell emphasizes the multi-dimensional coupling of genius and success. It is great to have a soaring IQ, but that is not the sole success determinant; in fact, it is not the primary element in most instances. He introduces many complementary and reinforcing factors like hereditary traits, birth-date, family closeness, religion, wealth, educational opportunities, exposure to helpful people and organizations, historical period, and especially a luck component. Being the right person during the right timeframe is crucial to success.
Solid preparation is necessary and takes you a long way down the success pathway, but it is not sufficient to reach a target goal. The haziness and uncertainties of future events introduce luck as a residual and unknowable factor. Other authors have made similar arguments.
Jonah Lehrer’s engaging 2009 book, “How We Decide”, puts our decision-making skills under the microscope. He focuses on the interactions between the reflexive and the reflective segments of the brain to explore the boundaries between reason and intuition. In that sense, this book shares many characteristics with Jason Zweig’s groundbreaking best seller “Your Money and Your Brain”. Just like Zweig, Lehrer explores the inner workings of the brain and how various parts of it compete in making intuitive and/or thinking decisions.
In contrast to conventional economic modeling that assumes complete rationality, Lehrer, and many others, concludes that emotions and irrationality are dominant in many decisions. He reports on countless behavioral science studies that support this observation. He provides illustrations on “negativity bias” and “loss aversion”, the tendency for the brain to register bad news more strongly than good news. On the negative side, early book reviewers have logged a common complaint that Lehrer’s book has almost nothing to say about the decisions that we would conventionally describe as “emotional”.
Regardless of this shortcoming, Lehrer prescribes a multi-step procedure for how to make good decisions. Here is a summary of his three-tier process. The obvious zero-order step is to always pause to engage both portions of our brains in all situations that are not so time constrained to permit that engagement.
For simple decisions, especially ones dominated by a limited number of numerical considerations like price, fully exercise the reflective (the reasoning) portion of the brain. Take time to assemble, evaluate, and interpret the database. According to Lehrer, the brain is more or less bounded by a capability to assess only about seven criteria or factoids when making an informed decision. When the decision complexity level exceeds that level, the brain is overloaded and defaults to simplistic heuristics that often produce faulty decisions and regret.
If the problem or event scenario is entirely new, then the reflective segment of the brain must be totally and solely engaged in the decision making. Thinking must first diverge to explore all options before converging to a final approach and decision. Here, the 10.000 Hour rule becomes important. Creative solutions should be extracted from similar past experiences that can serve to launch us in the proper direction for the current dilemma.
At the most complex level of problem solving, gut intuition and hunches can guide us through the maze. Frequently, we are overwhelmed by the options available, the endless data streams, and the sheer complexity of the choices. Under these circumstances, accepting our gut emotional feelings proffers the likelihood of a good decision, but also offers emotional satisfaction as a byproduct.
A tough task is to identify under what circumstances to abandon a full commitment to the thinking brain. One technique that can be exercised to accomplish this challenging task is to put the decision further downstream for a short period (time permitting) before making that final decision. “Sleep on it” is not bad advice. In the end, we must all be emotionally comfortable with all our decisions. Otherwise we will not be happy campers.
The presumption of human rationality is flawed; we mostly make decisions in an emotional state. However, we do learn from our mistakes. One of our persistent problems is that we see patterns that simply do not exist. To compound this defect, we suffer from very asymmetric loss aversion. We doubly fear losses over rewards. These human shortcomings participate in inept decision making. Behavioral researchers make a living studying these inefficiencies. However, we do accumulate wisdom from our experiences (again the 10,000-hour rule applies).
Lehrer remarks that “hard problems rarely have easy solutions”. We can and do address these shortfalls with experience, with careful preparation, and with an organized plan that fully uses all our resources. Aircraft failure incidents were dramatically reduced when pilots adopted a Cockpit Resource Management (CRM) concept that encouraged active decision making participation from all the aircraft’s crew members. The wisdom of the crowd wins once again.
Successful gamblers share two common traits. They fully understand their game of choice. They grasp and embrace its rules, its odds, its nuances, and its emotional impact. They also know and accommodate its money management demands, They never, never wager their entire kiddy on a single chance event unless the success probabilities are nearly One. In a real world scenario that never happens. It is paramount to collect all the known facts, but all the impacting facts are never fully known. Since the future is uncertain, all complex decisions are risky; chance and luck are persistently present. Resource management allows the player to stay in the game for yet another opportunity at the golden ring. We are all mutual fund owners so we play in this arena.
So, good luck to all of us on our investment programs.
Best Regards.
Comments
I'll ask Chip to add all three to our Amazon store, and I'll try to remember to highlight them in the December commentary.
As ever,
David
fast thinking. 'Outliers' talks about the need for sustained effort to get to the top of any field.
http://www.ted.com/talks/malcolm_gladwell_on_spaghetti_sauce.html
Regards,
Catch
Thank you for the heads-up with regard to Dan Kahneman's new book. Since Kahneman is usually credited with being one of the godfathers of the behavioral science revolution, I too suspect it will delve deeper into the thinking process with more insights then a popular science writer like Gladwell can muster. This comment is not intended to shortchange or disparage Gladwell. He is a fine writer and very perceptive. I like both him and his documentation style.
However, it is simply an acknowledgment of the distinction between a front-line producer source and a second tier reporting of results. Trust the doer.
Best Wishes.
They've been added to the store.
Happy reading,
chip