I read a lot. And cut and paste a lot. And save a lot of things, From time to time, I don’t feel like “working” and I just read from this rat hole. I sometimes forget I should be careful.

Nobelists, authors, behavioral scientists, and CSC favorites Amos Tversky and Daniel Kahneman first published their first “real” piece over 40 years ago, “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.” Ok, the world still ignores that.

In the piece and many times subsequently, they describe a phenomenon known as judgment by representativeness through a series of examples and experiments. One of which involved telling a group of grad students (they are always grad students) that another 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? The group of geniuses 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.”

So look at all the potential “informational” crap that is thrown in our faces 24 hours a day in every form imaginable. Is it still possible to make rational decisions? It’s just harder. And that is why our investment process always boils down to a tab on a spreadsheet that lists “no more than 4 critical variables for success.” The rest is noise. Getting that mental frame right is good investing. Unless of course, you want to Meme our portfolio next week.

– Jeff Bronchick