Thursday, April 13, 2006

Take A Simple Idea & Take It Seriously

“Our ideas are so simple that people keep asking us for mysteries when all we have are the most elementary ideas”—Munger

While watching Memento I realized that a man with limited ability or cognitive tools can still accomplish otherwise seemingly impossible task if he somehow manages to create a system that serves as an antidote to the limitations. One good example can be the sign language that mute people use to interpret their thoughts with other people.

Much engrossed by this thought I started thinking, as an investor, about the importance of creating a system which not only incorporates proper checks and balances to take care of our limitations but also serve as a foundation to stick to the knitting. This post is a way of giving structure to such a system. The following are the important ideas that constitute the system so far.

Mental Models:
I think one of the major difficulties that we face as an individual is matching our actions with our notions. The reason I think is the dominance of cognition, which is situation dependent, over perception. And it is also true that cognition per se can be misleading at times because of the biases. This is where I think connecting reality with pre held notions (mental models) can help us extrapolate past and present in a better way. And once you start using mental tricks the system becomes that much more efficient.

“If you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands”—Munger.

I don’t know if I have been following the multidisciplinary path skillfully but it has been six months since I was introduced to mental models by Prof. Sanjay Bakshi and ever since I have not spent a day without thinking about mental models. It just becomes a part of what you are and it is fun, after all. For ex:

He’s the best physician that knows the worthlessness of most medicines”—Ben Franklin. (Backward thinking/reductionism)

Opportunity Cost:
“Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter out buying opportunities”—Munger.

Life is all about making choices. Right from buying a shoe to buying a stock everything boils down to opportunity cost. It so happens that the next best alternate foregone becomes a sort of hurdle rate. For example consider the opportunity cost of getting married. The hurdle rate in this case is sacrificing half your bed (just that?). Now if the person who occupies the other half is worth more or less dependents on the choice one makes—choosing your spouse. Many a times I have seen people who some where down the heart feel that half a bed is worth more than the spouse! But taking steps accordingly can be cited as similar to selling a stock that has lost 90% of its value. So one ends up becoming a rationalizing animal. This reminds me of the following quote by Ben Franklin,

“Keep your eyes wide open before marriage, half shut afterwards”

Compound Interest:
Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things”—Munger.

By understanding this simple idea one can realize that it is not necessary to do extraordinary things to become successful, just doing good enough over the long run will lead to that end. Having said that we should also realize that there will always be people who will do better than us. Instead of getting envied we should only acknowledge their work and try and learn something from them. In short if one is trying to increase his productivity per hour one should not wonder at somebody else doing better than him but instead learn something from him. The time wasted wondering comes at a cost and it of course will reduce the productivity per hour. Mankiw said in ‘Principles of Economics’ that wealthy nations have better productivity per hour as compared to poorer natoins. The same is the case with wealthy individuals as compared to poorer ones, I think.

It’s not a one way road to Rome:
What you learn in adversity—no university can teach you”—Imran Khan.

Here I would like to bring in one of the properties of cause and effect, “Cause and effect can be widely separated in time and space.” Thus if we can somehow keep on doing what we ought to do irrespective of all the hurdles that come along the way we will somehow reach our goal. This is my belief in the power of the simple law of cause and effect stated above, nothing higher than that.

Circle of Competence:
“I’m no genius, I’m smart in spots, and stay around those spots”—Thomas Watson Sr.

I think most of us have problem realizing our circle of competence because human nature being what it is, we tend to overestimate our capability and undermine the capability of others. But once we approach somebody who has something good by asking, ‘why is he better than the most of us?’ we stand the chance of not only learning great many things but also better realize our limitations. And working backwards from our limitations we can easily sort out the better qualities in us.

“The name of the game is continuing to learn. Even if you’re very well trained and have some natural aptitude, you still need to keep learning”—Munger.

A small leak can sink a great ship:
Somebody once said, “A chain is as strong as its weakest link.”

Just as a value investor looks for opportunities which have very low downside risk, we should not allow any characteristic in our system that can act against other powerful ideas. This variable can be our attitude or some kind of addiction.

Conclusion:
When we start thinking of our environment as a system we realize that we are nothing but a variable of that system. It is this collection of variables that make that system possible but malfunctioning of one particular variable will have no or little effect on the system. Similarly, our system is designed to operate in a much larger system. What makes our system efficient is the power our system can absorb from the much larger space. For example, an investor cannot hope to realize the fruits of compound interest without acknowledging the way stock markets work. Thus we should be ready to make changes as things change around us.

“Those who will not face improvements because they are changes will face changes that are not improvements”—some Victorian minister.

5 Comments:

Blogger Madison Alexander said...

when you say "One good example can be the sign language that dumb people use to interpret their thoughts with other people."

i think you mean to say deaf people.

12:36 AM  
Blogger arpitranka said...

Hi Alex:
If I am not mistaken then both deaf and dumb people use sign language to communicate with the world.

Thanks for pointing out the mistake!

7:35 PM  
Blogger aquamit said...

hi....i too have an objection on the word 'dumb'...actually it has a derogatory touch..
the post is a good read..

8:51 AM  
Blogger Steven said...

Hey I am all for calling a duck a duck...but for a guy who proclaims to work through problems with mental models...you need to follow some of the quotes form Munger et. al.

People who cannot artiuclate with oral speech the spoken word (muteness) are not dumb...as it is commonly used

People who cannot hear the spoken word (deafness) are not dumb...as it is commenly used

while you may be technically correct that someone who lacks the power of speech is dumb

see http://www.m-w.com/dictionary/dumb
a "lacking the human power of speech dumb animals" b "of a person, often offensive : lacking the ability to speak"

it is important to note that the primary defintion of dumb is that all animals are dumb because they lack human speech therefore lack of speech = being an animal...thats why the second definition is "often offensive" because a human who is "dumb" is equated by definition to be on par with my dog...and such a person is not...

Stepan Hawking is I beleive incapable of human speech..but last time I checked no one reffered to him as dumb...actually he would be less than dumb since he is also incapable of sign language as well...

dont get me wrong...I am not a sensitive kind of guy at all...I am simply addressing the point of mental models...and their usefullness..has the ahutor of this blog is so keen to point out...you must recognize your limitations...and not recognizing that the english language has changed has changed since the "recent" invention of sign langauge...what 130 or so years ago...is a big blind spot...

so while the use of "dumb" may have applied prior to th envention of sign language...130 years ago..recent history..oh I dont know..what the last 100 years of so..instucts that "dumb" is currently defined as

requiring no intelligence and not having the capability to process data. see above dictionary cite.

and people who can learn and communicate with sign langauge clearly have the ability to process and communicate data.

so filter that through your mental models...and before you respond with something akin to arguing context...let me cite to you your own words...

your paragraph refers to "dumb" people as people who use sign langauge because of "limited cognitive tools" (please note that you used the disjuntive or and not the conjuctive and therefore the sentance works without ability).

And the ability to speak human speech has nothing to do with the cognitive ability of an individual (if you wire my jaw shut I have lost the power of human speech...does that now make me dumb? or was I dumb to begin with)

your discussion of the use of mental models will carry more weight with your readers if you first apply them to your own thought process rather than preaching to others how to use them (do as I say and not as I do does not endear many to tohers).

And the only reason I have writtien this much is because you actually tried to defend yourself to the first person who called you on it thereby demonstrateing that you do not follow your own mental models of recgonizing your own limitaitons (as for me I kno my limitations...I cannot spell worth a damm but I am aware of it).

So if you dont mean to be offensive just say so when the first person calls you on it...or just say that you think that people who use sign language are animals...akin to a dog because they lack human speech...

but dont try and hide behind a definition that was applicable as a common definition some time ago.

Steven

p.s. for those of you who wish to respond in defnese by citing to the local use of the word dumb...please save your time...the author has chossen to blog on website which was started in S.F. and is now owned by Google (which I beleive is headquartered in California) Therefore, the relevant context is the English or better yet the American usage as opposed to the writer's local simply because the writer has chosen this blog as opposed to a blog supported by a company whose national orgins exist somewhere else. If that had been the case than the usage may have had more utility. (For those of you who realize that Jaguar, Volvo, and Land Rover are now american cars..you get what I mean...those of you who dont..well my toyota was built in the states..does that mean it is an american car...nope its japenese...or should I say made by short men who eat a lot of rice have pronounced buck teeth and overbites who have poor eyesight and wear thick glasses...cuz that defintion was used by americans 60-70 years ago...so it must still be okay to use...right...no??...oh wait a minute let me run that through a mental model...you know what that def. dont apply no more...I am sorry..se how easy it is...good thing I am not dumb..

5:46 AM  
Blogger Arpit Ranka said...

As somebody who was not familiar with the derogatory aspects of the word 'dumb' - when used to describe somebody who cannot speak - all I can say is I am sorry that this has affected a few people over here and am changing it with 'mute'...

I hope that the reader understands that my intention was not at all to use the word in any derogatory sense. Thanks...

12:33 PM  

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