People are superb pattern makers
If you give people a vast horde of information they will find patterns within it. Much like the movie “A Beautiful Mind” where, while in a state of schizophrenic confusion, mathematician John Nash could find patterns that had meaning to him but no other.
The stock market provides such a vast horde and one must be careful how it is used.
What if there was less short term information?
Would you better off? It seems so. In the late 1980s psychologist Paul Andreassen discovered that when people were given frequent information about price changes in the stock market, they did far worse than those who were given price information alone. The ones with just price information did about 56% better than those with price change information.
Daniel Kahneman makes a similar point
“When no specific evidence is given, the prior probabilities are properly utilized (people use the base rates); when worthless specific evidence is given, prior probabilities are ignored.”
I think that means when people have enough specific evidence they find patterns in the noise and ignore historic reality.
Predicting the precise future is not possible
We can however make our lives simpler if we predict that future will be somewhat like the past. It is known as the Lindy Effect. Things that have been useful for a long time can expect to work for a long time to come. Not very precise, but it is hard to imagine the changes needed to make capitalism fail. In fairness, it would be harder to imagine what would make socialism work. Perhaps we are best served by the ideas that people will:
- Work to make their lives more comfortable
- Want better for their children
- Be resourceful
- Adapt as they go along
Times have changed and people are still adapting
Then internet makes information pervasive and nearly instant. People assume they must process it as quickly.
A hundred years ago, an exchange of letters could make decisions into months long structures. Today, hours is more normal.
What has been lost?
Time to reflect. Most good decisions are not perfectly formed in the first draft.
The speed of information has changed, but our ability to process information is still pretty much as it was a hundred years ago. So to Kahneman’s point. Having a lot of information, a recent capability, may lead you to spurious patterns.
Don’t notice the complex pattern when there are simple explanations of the same data.
Bad analysis hurts you.
Change is everywhere but it is often just embellishment on a solid foundation of things that work. Do not dismiss the past too quickly. Seek fundamental ideas and see how they will last for a long time.
Most important, don’t believe everything you think.
“I used to think that the brain was the most wonderful organ in my body. Then I realized who was telling me this.” Emo Phillips
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. firstname.lastname@example.org 866-285-7772