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Sunday, March 11, 2012

A slow thinking problem: Why so few still get gold

A bat and a ball cost $1.10.  The bat costs $1.00 more than the ball.  How much does the ball cost?


How much?

If you answered 10 cents you're wrong.

In Daniel Kahneman's brilliant book "Thinking, Fast and Slow" he points out that even 50 percent of Harvard, Princeton, Yale and MIT students who partook in this study got the wrong answer to this simple question.  The ratio moves to 80 percent in "less selective" colleges.

Why can't even our brightest citizens think well?

Dr Kahneman posits two distinct thinking processes that battle each other in the human brain.  Fast thinking is a process dominated by snap judgements and pre-judgements based on everything we think we know.  In other words, it is a thinking process dominated by non-deliberation.

Slow thinking takes effort.  It mean slowly going through the process that Plato called: Syllogism: Reasoning Together.  Plato noted that to do this successfully you have to ask what is this, what is it not, what does it seem to be, what does it seem not to be.  Whether or not you literally ask and answer each of these questions, you still have work though those issues. 

It takes a few seconds to actually think the above problem through.  Maybe you got it.  Maybe you're used to thinking things through.  If so, you're in the vast minority of US citizens, who are obsessed with instant gratification, instant information and instant analysis.

What does this have to do with gold?

Most US analysts examine all economic markets - especially gold - as a function of historical ratios.  They claim that because the gold-dow ratio or the gold-silver ratio or the gold-gold stock ratio is this and such etc etc, therefor the gold price should be doing this and such.  Or because moving averages and stochastics etc. in the past have shown this and such, this and such will ensue.

This is all a product of fast thinking.  It's easy, it's reassuring,  It involves historical ratios and outcomes.  And it's almost always wrong.  Because as we move forwards in time underlying conditions that informed the ratios in the past have changed.

This is why technical momentum traders all lose money over time.  And this is why 95 percent of US investors still don't get gold.

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