Market Curiosity: Exploring Markets And Systems

February 10, 2011

Miguel Barbosa Interviews Michael Mauboussin: Author, Investor, & Multidisciplinary Thinker

Filed under: Systems — Tags: — Jeff Fitzmyers @ 8:37 pm

Remarkably, decision making is the most important facet of investing and is probably the least taught aspect in business school… 1 prepare, 2 recognize, and 3 apply….The main point is that it’s really difficult to manage a complex adaptive system, because you can’t see the connections between the agents.

Many people focus on supposedly causal relationships like if the US Dollar Index goes down, gold, bonds and oil typically do XYZ. Often those relationships hold, yet sometimes they don’t for periods of time. This can mean many things, and it can take a lot of analysis to figure it all out. Although interesting, and Martin Armstrong seems to have it figured out, it’s not nearly KISS enough for me.

Through an extraordinary piece of scholarship, [Phil] Tetlock shows how poor experts do in making predictions in complex realms including political and economic outcomes… But his work also shows that some experts do better than others. The so-called foxes, who know a little about a lot of things and don’t get wedded to a particular view, predict better than hedgehogs, the folks who know a lot about one big thing… It may be that you are to some degree born to be a fox or a hedgehog, but to become a fox, or work on foxiness, you have to read a lot and be willing to change your view. Reading and evolving are really hard work.

One of the striking findings from the conformity research is that it is the perception of people that change when they conform. They’re not going along only because they want to fit in; what other people believe shapes what they believe.

This is why I tend not to read other’s “analysis”: I scare myself out of trades, or convince myself something will be a very profitable trade. I inevitably lose money or opportunity cost not doing what “I” do.

First, part of an investor’s skill is the system in which he or she operates. If you remove them from their system, they may not be able to operate at the same level. You can see this all the time in business and sports. Second, you need to take luck into consideration. Extraordinarily good, or bad, results almost always reflect a lot good or bad luck.

The main lesson from studying fitness landscapes is that as you are improving it can be the case that your short-term performance may suffer even as your long-term prospects are brightening. So focus on getting better every day, and don’t worry too much about the short-term blips.

… the lesson is to always be diligent about what you are not observing, not just what you are observing…

…the right answer to most questions in investing is “it depends.” And figuring out what it depends on is one of the main jobs for an investor.

Most of my trade decisions (ideally!) revolve around observing how price acting around reference points: Bull, bear, change in trend? “Depends on what price does here, and what it didn’t do when it had the chance.”

I am often asked why I change my mind so quickly. It’s simple, I listen to what the market is showing, not what I want to see. — Dan Zanger

1 Comment »

  1. Great link – very interesting article on Michael Maubossin.
    I have found a good resource page on Michael Maubossin:

    Comment by xuzhu — February 28, 2011 @ 8:47 am

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