Belief Derived Reality

I have been reading, “The Believing Brain” by Michael Shermer.  It is worth a look.  His summary of the book:

We form our beliefs for a variety of subjective, personal, emotional, and psychological reasons in the context of environments created by family, friends, colleagues, culture, and society at large; after forming our beliefs we then defend, justify, and rationalize them with a host of intellectual reasons, cogent arguments, and rational explanations. Beliefs come first, explanations for beliefs follow.

He also points out that the brain does two things well:

  1. It creates patterns to explain observations and it does so whether the data is meaningful or meaningless.
  2. It assigns agency.  Everything has a cause and/or meaning.

These highly evolved skills can lead us far from reality.  Eventually what we decide about reality is more a product of our beliefs than it is of the reality itself.

My son Phil has said, “Theories in physics tell us more about how physicists think than they do about how the universe works.”

So what to do with your financial plan?

First, notice that your plan is based on reasonable and reasoned observations all of which may be both true and verified to be so.  They are knowledge and we like to base decisions on knowledge.

Second, notice that the plan you derive is true to the reality you have observed.  The plan is therefore, meaningful.  Meaningful is good.

Third, notice that your knowledge is based upon all of the observations you have made and the knowledge is a pattern of those observations.  The knowledge explains cause and effect given the observations.

Fourth, notice that the observations you have used are not all the possible observations and that the body of knowledge implicitly weights their relevance.  That is not so good.

Fifth notice that a) you have seen only some of what you could have seen, b) you have weighted it in some way that may not be the only way to do so and c) worst of all, there may be other possible observations and other possible weightings, none of which have ever been seen.  YET.

The system that Schermer points to is what he calls Belief Derived Reality.

You start with the belief, or perhaps select it prematurely based on what you observe, then prove it to be true, thus making it reality.  Essentially a system of reality that is a “provable” and internally consistent delusion.

By this method, reality is an illusion.  If we believe quantum mechanics then everything is an illusion.  Einstein has said, “Reality is an illusion, albeit a persistent one.”  But that may be too abstract to be useful.

Belief-Derived-Reality systems are prone to what Nassim Taleb calls “Black Swans”  Highly negative, or positive I suppose, rare events that don’t fit the accepted paradigms.  Not that Black Swans are impossible to see, just that they are rare enough that people ignore them in their reality system.They are outliers so simple theorems cannot include them.  For purposes of the theorem they must not exist.

How do your defend yourself.  Not easy, but it helps if you have learned a little about critical thinking.  Can you look at a Belief-Derived-Reality and ask a question about one of its crucial beliefs?  For example,

  • Is man made CO2 production the only possible cause of a warming planet?  If yes must be the answer to justify the various efforts extant, then one should test the “must be yes” to see if it is always true.  Has the planet warmed before with different triggers or at least with the absence of humans at all?  Probably.
  • Does the government printing money necessarily result in inflation?  If yes, then we will have inflation and your investment plan should be arranged accordingly.  If possibly no, then the plan that makes yes work will be very poorly adapted to the reality.  Is your belief in Yes, 100%.

The risk is in this simple thought.  Can you trust what you think?  The greatest risk is not in being ignorant, it is is in “knowing” something that turns out to be wrong or incomplete.

Knowing nothing is better.  When you know nothing you can still be right by accident.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

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