Michael Mauboussin's Think Twice: Harnessing the Power of Counterintuition Is Short but Sweet

All components of the human body are optimized for the ancestral environment of millennia ago. This has implications in most areas of science - Economist Arthur De Vany writes about how it affects our ideal diet and fitness regimens on his Evolutionary Fitness blog.

Michael Mauboussin's book Think Twice: Harnessing the Power of Counterintuition explores the implications with regard to decision-making - particularly investment decisions. The thesis of the book is that "smart people make poor decisions because they have the same factory settings on their mental software as the rest of us, and that mental software isn't designed to cope with many of today's problems." Think stone age era settings. But it's possible to think carefully (twice) and adjust for these shortcomings.

Here's an example shortcoming: pattern recognition. The book claims, "in a natural environment, almost all patterns are predictive;" meaning that they would have been almost always adaptive. But now there are so many complex systems, and we look for patterns where none exist. A good example of this, in my opinion, is most kinds of technical analysis. (Of course, history does have cycles. It doesn't repeat but it rhymes.)

The book is only 150 pages so I breezed through it in about 2 hours and came away with a number of interesting things marked.

He quotes Peter Drucker in a good section about mental inertia: "If we did not do this already, would we, knowing what we now know, go into it?" I like to look at my portfolio and ask this question. It's bad to let a trade languish just because it's there. On Friday, I decided I wasn't totally happy with my small peso short, so I covered it all and sold more Georgia Gulf (GGC). The point of this is to avoid the endowment effect, where you value something (like a trade) more simply because you possess it.

Some other good decision-making ideas are to seek dissent, and having a functionally diverse group make the decision. The book quotes economist Blake LeBaron on his research in modeling of stock markets: "During the run-up to a crash, population diversity falls. Agents begin using very similar trading strategies as their common good performance is reinforced. This makes the population very brittle..."

Also: keep track of previous decisions in order to get feedback on your decision-making. This is one reason why I blog. I have found that my bad trades are the ones I don't blog. When I don't have enough confidence in them to blog them, that is a bad sign.

All told I give this a 4/5 rating, thanks to its brevity.

Comments

[Anthony Alfidi:]

Using counterintuition can help avoid confirmation bias. Investors should always rigorously examine their own thinking for flaws. This is always hard, so making it a habit helps. Bloggers have the advantage of a readily available record of how they felt about investment decisions when they made them.

Oct 31 08:39 AM

[Uppai Mappla:]

The ultimate way to stop the mind from making patterns is meditation. It is also the ultimate deconditioner and the liberator of intelligence. I mean simple meditation without holy books, holy words or mantras. Sit quietly and watch your breath or bodily sensations, without reacting to it. Practice it every day, at least half an hour a day. But it is difficult, very difficult. For example, close your eyes right now and watch your breath. Only rare people can even do that for a few seconds at a stretch, let alone one minute. After the first 20 seconds or so, the mind, unable to bear the stoppage of its relentless pattern-making and meaning searching activity, will shake you off from your breath watching.

Simple, no-frills meditation directly attacks the two worst enemies of the trader--fear and greed. If you want real lasting results, and the dawn of real intelligence without patterns, be prepared to take ten clear days off and join a "Vipassana" meditation course, which simply means "seeing things are they are, not as they appear to be." Vipassana is offered in almost all countries of the world. A prominent one is "dhamma.org." Vipassana, despite its simplicity, is hard work and it takes 10 full days of absolute retreat from the world. I mean no mobiles, no TV, no talking. Absolute silence. But those ten days could be worth millions of dollars for an investor. Relatively free from fear and greed, he/she would be able to take realistic investment decisions. That would be far more effective than reading books on counterintuition (which is actually making new patterns, not eliminating them), while meditation teaches counterintuition at the gut level. And it works.

Nov 01 02:09 PM

[svosavvy:]

we always seek what we can't have

Nov 01 11:10 PM

[svosavvy:]

We fight the battles of our childhood in adulthood.

Nov 01 11:19 PM

[Conventiona...:]

The "Face" on Mars.

Nov 02 10:07 AM

[Uppai Mappla:]

I am surprised at the positive ratings on my blog on meditation. I was actually expecting it to be ignored or negatively rated.

Today I googled for "meditation" and "trading" and got another surprise. A lot of relevant results came up. So perhaps I was more right than I thought.

Nov 04 05:22 AM