Models of Reality

The world of personal finance becomes more complicated with every passing day.  There was a time when the idea of negative interest rates would have sounded impossible.  Not now.  Trillion dollar debt would have made me wobble.  TV channels that dedicate themselves to business and market news provide a lot of light but not much illumination.  Job security, if you don’t work for the government, is tenuous at best.  Foreign exchange affects investments.

It will not get better.

Some people have tried to deal with it by summarizing.  Averages come up a lot in that process.  Others notice only part of the spectrum of possibilities.  There are people who create icons to summarize the world.  All of it becomes a bias or prejudice.  A way to respond without being required to know anything or to examine the details or to test their validity.  These approaches can make you feel better, but they do not provide an expectation of continuing success.

People who have the tools and some training build models.  These are materially better than prejudices but are still unlikely to project the future very well.  All models are sophisticated averaging techniques.  Replace a complicated or volatile variable with a simple one.  You cannot simplify anything without giving up information.  The idea is to give up the information that does not matter or that cancels itself out over time. Bonne Chance!

MP3 sound compression clips off the extreme sounds.  Many people cannot tell the difference until they hear MP3 side by side with something richer.  Models work like that too.  A model works until it does not.  Then what do you do?

The failing for nearly everyone is that they begin to confuse their models of reality with reality itself.  When you believe things that are flawed the result is always bad.  Just when.  Josh Billings and Mark Twain have both commented on this problem.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

There are defenses.  Know that you know too little and set about learning more.  Know that you will make mistakes.  The world will change after you make a decision.   Expect it.  Make your best decision and monitor its performance.  Revise the decision as you learn more.  Be wary of irreversible commitments.  Hire people who can fill in the gaps in your knowledge.  They aren’t cheap.  Low price / high value is a rare combination.

In the end, all important processes and outcomes evolve.  Decide, implement, record, review, revise, implement again.  Some people see it to be like a gerbil on a treadmill and avoid it.  Others see it as a manageable way to get what they need.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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