To make the complex simple, you must leave things out. You cannot know if they matter.
Does the past point to the future? We take it as sacred truth because it happened, but the only thing we know for sure is the past comes before the future. It has some meaning, but the mistake is to believe it has absolute meaning in the future.
When you think about it, the example we see and rely upon may have been the least likely thing that could have happened.
High school math is an ancient artifact, but some of its ideas remain. One of those is how combinations and permutations work.
Combinations are about how many ways there are to choose a given number of items from a collection. Permutations deal with how many ways there are to organize them once you select. For large sets of items the available results are near infinite.
How many possible datsets will I get to study.
There are 120 ways to select three items from a tray of ten. When order matters, there are six ways to organize the three I chose. So 720 ways altogether.
For a simple problem with 10 factors, relying on just three of them, there can be 720 structures to study. It is little wonder people use rules of thumb, instinct, and guessing to plan.
You cannot treat a single example using the three apparently important factors as defining how the future will work.
If you were thinking of picking five, there are 30,240 ways.
More than ten for sure. Probably more than ten thousand. The stock market has enough factors that it is chaotic. That’s why people read books like Benoit Mandelbrot’s The (Mis)Behaviour of Markets. The misunderstood reality is conventional analysis tools are incapable of a complete analysis. Where they come up short people make simplifying assumptions and so surprises will lurk. Few of us enjoy surprises when it comes to our money.
There is a difference between observing and seeing. We process seeing according to our own rules and that technique may not deal with reality very well. We revert to thinking biases and heuristics. We weigh things in ways more closely matching what we believe than what might be objective. Interestingly, we can see our own portfolio and we can observe a stranger’s portfolio. Observing uses different biases and different experience.
Combining the two would be more representative of reality, albeit still incomplete.
Sherlock Holmes made the point in, A Scandal in Bohemia, “You see but you do not observe.” His thought was followed a few paragraphs later by, “It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.” We all do it because we do not respect the number of possibilities there are and because we want a quick and simple answer.
In complex situations there are no quick and simple answers.
Factors that matter:
Well-analyzed and tracked decisions tend to be more durable decisions. The work you invest in making them is rewarded by the absence of firefighting as things progress.
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