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Tuesday, March 20, 2012

What you see is all there is

Daniel Kahneman's book on thinking as it regards investing/trading rests on the fundamental proposition that What You See is All There Is - at least as far as you're concerned.  You don't know what you're not aware of.  You don't take it into account.  And certainly there's a whole lot each of us is not aware of.

What we do is take that which we are aware of, and spin causal fictions to give us what Kahneman calls Illusion of Understanding, and Illusions of Validity.

This seems pretty straight forward, right?

It is until you consider that all economic theory developed and used by the financial industry is predicated on Full Information, Rational Decision Making, and Selfish Behavior.

Full information either in markets or individuals is absurd, Rational Decision Making by humans is laughable, and Selfish Behavior represents banks, but not necessarily private citizens.

Full information and rational decision making are two self serving fictions perpetuated by the financial industry that prop up what Kahneman calls "illusions of expert understanding."  Selfish behavior is clearly a projection of the financial industry onto all their clients.

In other words all the models, all the forecasting, all the talking head explanations that you get from your reports, your advisers, your favorite TV commentators are absolutely 100 percent worthless.

Dr Kahneman also back tests the forecasting results of the 100 top CFO's in the country over a period of 20 years and finds the correlation coefficient of the economic forecasts to be ZERO.  In other words, the proverbial Chimpanzee throwing darts would have done better.

Another of Kahneman's propositions is that personal and societal narratives are very hard to change, as they are based on nothing but fictions.  Therefor evidence to the contrary will always be viewed with suspicion, opprobrium and will usually be summarily discarded.

You can apply all this to whatever you might wish.  I apply it to gold.

As far as gold is concerned, the stubborn myths  the still have hold of the popular fiction are:

a) It's a barbarous relic of a bygone age.

b) It's worthless because it's useless.

c) It's a pointless investment as it has no yield.

d) There's not enough of it to anchor a currency anyway.

All of these are simply fictions we tell ourselves to make us feel better that we have no gold.  That we rely on the US dollar as the anchor of our financial lives.  Hang on to them as long as you can.  Once they are lost, they will be lost forever.

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