Embracing Chaos & Randomness

by on August 17, 2013  •  In Miscellaneous

Investing is hard on the psyche. Events don’t always make sense, yet external pressures often demand that you make sense of everything seemingly random. This can lead to frustration stemming from cognitive dissonance — the discomfort experienced when simultaneously holding two or more conflicting ideas, beliefs, values or emotional reactions. Perhaps this is why I enjoyed reading this speech that a man named Dean Williams gave almost exactly 32 years ago, advocating the value of simplicity and keeping an open mind to new possibilities, even if they don’t always make sense at first. Many thanks to my friend Dhawal Nagpal for sending this across.

Psychology, Creativity

“The foundation of Newtonian physics was that physical events are governed by physical laws. Laws that we could understand rationally. And if we learned enough about those laws, we could extend our knowledge and influence over our environment. That was also the foundation of most of the security analysis, technical analysis…methods you and I learned about when we first began in this business…if we just tried hard enough…If we learned every detail about a company…If we discovered just the right variables…Earnings and prices and interest rates would all behave in rational and predictable ways. If we just tried hard enough.

In the last fifty years a new physics came along. Quantum, or sub-atomic physics. The clues it left along its trail frustrated the best scientific minds in the world. Evidence began to mount that our knowledge of what governed events on the subatomic level wasn’t nearly what we thought it would be. Those events just didn’t seem subject to rational behavior or prediction…the investment world I think I know anything about is a lot more like quantum physics than it is like Newtonian physics.”

“…we should be more content with probabilities and admit that we really know very little.”

Williams highlights three tenets of successful investing:

1. Respect the virtues of a simple investment plans

“Albert Einstein said that ‘…more of the fundamental ideas of science are essentially simply and may, as a rule, be expressed in a language comprehensible to everyone.’” 

“The reason for dwelling on the virtue of simple investment approaches is that complicated ones, which can’t be explained simply, may be disguising a more basic defect. They may not make any sense. Mastery often expresses itself in simplicity.”

2. Consistent approaches – good discipline and the sense to carry them out consistently

3. Exercise the “Beginner’s Mind” – opens your mind to more possibilities, avoids cognitive dissonance, and the possibility of confirmation bias

“A very special tolerance for the concept of ‘nonsense’…Expertise is great, but has a bad side effect. It tends to create an inability to accept new ideas.”

“In general, physicists don’t deal in nonsense. Most of them spend their professional lives thinking along well-established lines of thought. The ones who establish the established lines of thought, however, are the ones who aren’t afraid to venture into what any fool could have told them is pure nonsense…‘In the beginner’s mind there are many possibilities, but in the expert’s mind there are few.’”

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