“The High Price of Free Dumb”

As we close out the year, I would like to “note” one Steve Duneier, who is frankly difficult to describe, as one can imagine after reading his Wiki. (https://en.wikipedia.org/wiki/Stephen_Duneier)

I am not sure exactly how I ran into Steve, but this firm is always interested in “thinking different” and thus we found ourselves a client of his for a year. As is often the case, sometimes it’s not necessary to truly break new ground, but present familiar material in a forceful and thoughtful way in the right place and the right time with the right people to be effective.

Steve had a serious stroke this year and is no longer carrying on his work as Bija Advisors. I have cumulated some interesting thoughts of his which resonate here.

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The High Price of Free Dumb

“It takes a huge investment in introspection to learn that the thirty or more hours spent ‘studying’ the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world.” — Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb.

I discovered this for myself well before Taleb wrote about it in 2008, but long after Amos Tversky and Daniel Kahneman first published their findings on the matter 32 years earlier, in a piece entitled, “Judgement under Uncertainty” in Science. They explained that in order to make decisions when the outcome is uncertain, we rely on our beliefs to assign probabilities to each of the potential outcomes.

What they discovered is that very often the heuristics, or mental shortcuts we employ lead to biased expectations, which can result in “severe and systematic errors.” They describe a phenomenon known as judgement by representativeness through a series of examples and experiments, one of which is particularly applicable to Taleb’s point. In it, they tell subjects that a group consists of 70 engineers and 30 lawyers. Without providing any additional information, they asked the subjects what the probability is that a particular individual selected from that group is an engineer. They correctly judged it to be 70%.

They then provided the following personality sketch of the individual in question.“Dick is a 30-year-old man. He is married with no children. A man of high ability and high motivation, he promises to be quite successful in his field. He is well liked by his colleagues.” The description was meant to convey no information relevant to the question. Therefore, when asked again what the probability is of him being an engineer, the answer should have remained 70%. However the subjects now judged the probability to be 50% after reading what was essentially worthless information.

“Evidently, people respond differently when given no evidence and when given worthless evidence. When no specific evidence is given, prior probabilities are properly utilized; when worthless evidence is given, prior probabilities are ignored.” Armed with the evidence that even perfectly innocuous information can have a detrimental impact on your ability to make rational decisions, does it make you question the real cost of all that free research flooding your inbox? Will you take action? If so, when?

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The High Price of Free Dumb

As I mentioned in “Do Not Read This” (Seeds of Thought, Issue 15-6, 2/11/15), an information portfolio with 100 components that are 60% correlated offer the same diversification as one with 4 components that are 40% correlated. If you find yourself skimming everything and absorbing nothing, re-build your information portfolio, intelligently and deliberately, with publications that deliver unique content and improve your performance in different ways.

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Easy Money: Mistakes of Paul Tudor Jones

Here’s the thing about big contrarian calls like this one. People tend to become attached to them. For many, it’s difficult to simply walk away, to stop talking and thinking about it, for it is the narrative to which they become attached. Narratives can morph if they aren’t pre-scripted, making it difficult to know when they end. However, if you treat it as simply another expression of a view, one with gradually diminishing risk/reward attractiveness, with specific and finite expectations, it is easy to leave it behind when they are triggered.

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What Dieting Taught Me About Consuming Information

The “Availability Cascade” is defined as a self-reinforcing process in which a collective belief gains more and more plausibility through its increasing repetition in public discourse (or “repeat something long enough and it will become true”). It is a dangerous flaw in our cognitive process, because it can be easily capitalized on by the deceitful and the hucksters. We are their prey and our only defense is to be more critical in our thinking.

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Seeds of Thought

The same occurs in our own industry. Take this excerpt from Mark Buchanan’s The Social Atom: “A few years ago, for example, the economics consultancy. Of course, no one wants to admit to being part of the flock. Everyone is looking for “uncorrelated”, perhaps the most overused, least sincere term in our industry. Here is the thing about being uncorrelated. In order to achieve uncorrelated returns, you must think in an uncorrelated way. Remember, uncorrelated is not the same as negatively correlated. Contrarians provide negatively correlated returns, but fundamentally, they are still driven by the same inputs as consensus thinkers. In order to truly deliver uncorrelated returns, you must derive and process your information differently. While uncorrelated returns are very desirable, because of their many benefits, in order to achieve them, you must be willing to delve into things that, by their very nature, will make you uncomfortable, even frightened. You must be willing to challenge yourself, and your beliefs. And therein lies the reason so few achieve uncorrelated performance and even fewer allocate to it. Confirmation bias is a far more powerful force than the desire to outperform.

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