Thursday, December 29, 2005

Understanding Cause & Effect

Perception is our understanding of reality & we understand reality by relating cause & effect. When what we perceive is in line with reality, the perception becomes an information. Mental blocks of such information collectively consititutes our knowledge. But sometimes what we perceive, because of cognitive illusions, can be in contradiction to reality.

"When perception does get through to man’s brain, it is often misweighted, because what is registered in perception is in shockingness of apparent contrast, not the standard scientific units that make possible science and good engineering"-Charlie Munger

I think understanding the limitations in relating cause and effect can help us reduce the perception-reality gap.

"Just as a man working with his tools should know its limitations, a man working with his cognitive apparatus must know its limitations"--Charlie Munger.

Cause & Effect:
"Today is yesterday's effect & tomorrow's cause"--Philip Gribble

The above quote highlights the importance of the fact that the present can be seen in context of past & future. Similarly we can use our thought process in two different, both equally important, modes, Forward thinking & backward thinking. None of the these is limited to relating present to past or future, as the name may suggest. Instead, backward thinking suggests relating causes to some known effect & vice versa.

Backward Thinking:
"'Invert, always invert,' Jacobi said. He knew that it is in the nature of things that many hard problems are best solved when they are addressed backward"--Charles Munger.

It is the process of working backwards from the effect & attributing causes, based on our understanding of the effect. We all do this almost on a daily basis. But we often forget a very important property of cause & effect,

"Causes & effects can be widely separated in time & space" by Joseph Connor in 'The Art of Systems Thinking'

The reason behind that is human mind has limited circuity & it can easily get influenced by psychological tendencies (like availability bias, first conclusion bias while attributing) The point is while attributing we tend to overweigh the elements which are readily available for our cognition to assimilate.

"Cognition is ordinarily situation-dependent so that different situations often cause different conclusions, even when the same person is thinking in the same general subject area"--Charlie Munger

This could be dangerous as we could end up without attributing any cause to the effect or even worse we can end up attributing wrong cause to the effect. Operating with such a disadvantage can be cited as similar to Mr. Munger's, 'disadvantage of one legged man in an ass kicking contest'

Forward Thinking:
"If corporate pregnancy is going to be the consequence of corporate mating, then the time to face that fact is before the moment of ectasy"-Warren Buffett

This is the bottom up approach where we work from a cause & think of various effects that the cause could induce. But we often forget an important property of cause & effect,

"Effect can be disproportionate to the cause" by Joseph Connor in 'The Art of Systems Thinking'

Think of a conglomerate which enters into a new business. Once the new business is created it gets a life of its own. The reason behind that is 'effects of effects' (ie) effect can become cause & induce further effects, which may become uncontrollable. The point is while thinking we should incorporate the effects of effects, where the smallest of causes can lead to a larger effect & vice-versa.

The cornerstone for successful investing is "Take care of the downside & the upside will take care of itself." Similarly, I think the cornerstone for successful use of our cognitive apparatus is

"Take care of the limitations & the advantages will take care of themselves"


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