I am skeptical about stories and with using the past to predict the future

[giofranchi]

Sportgamma,

I have “surfed” your website: very interesting, congratulations!

I am curious: why did you write “I am skeptical about stories and with using the past to predict the future”?

I can understand that stories might just be temporary fads… but the past? Isn’t the study of past history useful? Isn’t the study of past human behavior useful?

I am reading the latest by Mr. Marks and he starts like this:

 

The truth is, anyone who reads my memos of the last 23 years will see I return often to a few topics. This is due to the frequency with which themes tend to recur in the investment world. Humans often fail to learn. They forget the lessons of history, repeat patterns of behavior and make the same mistakes. As a result, certain themes arise over and over. Mark Twain had it right: “History doesn’t repeat itself, but it does rhyme.” The details of the events may vary greatly from occurrence to occurrence, but the themes giving rise to the events tend not to change.

 

I also put great emphasis on the study of history.

 

giofranchi

[alwaysinvert]

History as it happens is interestiing. But history is almost never told as it happens and that's the danger of it. Complexities and messiness wither away, the loser's tale gets lost and later people interpret it with the eyes of another time with a different set of moral and scientific axioms and ideologies. It gets fitted into a nice narrative which suits a specific implicit or explicit agenda.

 

This always fascinates me when I read a biography. Who told the author this and why? What's in the interest of the author? To write a readable story which sells (and in the case in which the author is hired or sanctioned by the biographee, optics matter even more) and not to give the historical truth. I think this is well illustrated in the fact that Newton's story of the falling apple is completely made up - about 20 years after he published his Principia Mathematica. And why? Because Newton realized that it was a great narrative and boy was he right.

[boilermaker75]

History as it happens is interestiing. But history is almost never told as it happens and that's the danger of it. Complexities and messiness wither away, the loser's tale gets lost and later people interpret it with the eyes of another time with a different set of moral and scientific axioms and ideologies. It gets fitted into a nice narrative which suits a specific implicit or explicit agenda.

 

This always fascinates me when I read a biography. Who told the author this and why? What's in the interest of the author? To write a readable story which sells (and in the case in which the author is hired or sanctioned by the biographee, optics matter even more) and not to give the historical truth. I think this is well illustrated in the fact that Newton's story of the falling apple is completely made up - about 20 years after he published his Principia Mathematica. And why? Because Newton realized that it was a great narrative and boy was he right.

 

Newton was one sharp dude, except when it came to investing!

[Sportgamma]

Hey Gio,

 

Thanks for visiting the site, I´m glad you liked it. Wow, it seems like ages since I wrote that sentence, I did not even recognise the title of the thread.

 

First of all, I think a fair amount of scepticism is always healthy. Regarding using the past to predict the future, I think we have to make a distinction between using historic data to identify common phenomena, such as business cycles, human biases, etc. or using a trend to project the future.

 

I´m not sure whether I wrote this before or after the Icelandic banks collapsed, but bear in mind that the banks had steadily increased their profits, from quarter to quarter and just as the turkey at its heaviest the day before it got slaughtered, they were recording record profits in their last year of existence. What I was referring to is the weighting of the turkey to predict its future weight. What you are referring to is studying the weight patterns of turkeys in slaughterhouses to discover repeatable patterns (Marks also quotes "if something can not go on forever it must come to an end).

 

What I try to apply to my work and investment process is to use history to form the necessary assumptions, but at the same time prepare for various probable future outcomes. The thing that impresses me the most about WEB is the way he used a decision-tree-like approach during the partnership years (http://sportgamma.net/2012/04/29/ryan-morris-and-the-value-of-the-activist-option/).

 

[berkshiremystery]

I might throw some things into thinking,... specially also the word "temporal analysis".

Steven Spielberg's "Minority Report" with Tom Cruise hunting future criminals may be spoky,... is it,... but currently the C.I.A.'s secretive "In-Q-Tel" venture capital subsidiary in a partnership with Google Ventures is experimenting in predicting future outcomes of events unfolding today through their Recorded Future, Inc. investment.

 

Recorded Future tries to build a similar algorithm like Google famous page-rank algorithm,... by harvesting "chatters" accross all the Internet, Reuters, Bloomberg...and CNN news reports, Facebook, Twitter, boards and forums,... etc. ...comparable like Sanjeev beeing some secretive overlord here and watching these boards over those years,... seeing a slowly rising trend in BAC & AIG discussion threads. That's "Eureka" !!! I have found the Tooth Fairy,... like the little boy in "A.I.", an artificial robotic little boy, that becomes almost human in his feelings through genetic algorithms, just by stalking and crawling his positronic brain.

 

Of course, there are many variables that make the future blurry the more agents interact in complex systems,... i.e. Edward Lorenz Butterfly Effect/Chaos Theory. But at least this new developing science field and such an algorithm might spot new emerging trends.

 

Google Teams Up With CIA to Fund "Recorded Future" Startup Monitoring Public

 

An Introduction Recorded Future

http://m.youtube.com/watch?v=2YQNQ_GLe9Q&feature=m-ch-fea

 

Intelligence Analysis @ Recorded Future

http://m.youtube.com/watch?v=5CZQaFWWKtA

 

-------

 

RecordedFuture, Inc.

https://www.recordedfuture.com/

 

RecordedFuture, Inc. @ Wikipedia.org

http://en.wikipedia.org/wiki/Recorded_Future

 

In-Q.-Tel (C.I.A.'s venture capial firm) @ Wikipedia.org

http://en.wikipedia.org/wiki/In-Q-Tel

 

 

 

 

 

 

[Guest valueInv]

History as it happens is interestiing. But history is almost never told as it happens and that's the danger of it. Complexities and messiness wither away, the loser's tale gets lost and later people interpret it with the eyes of another time with a different set of moral and scientific axioms and ideologies. It gets fitted into a nice narrative which suits a specific implicit or explicit agenda.

 

This always fascinates me when I read a biography. Who told the author this and why? What's in the interest of the author? To write a readable story which sells (and in the case in which the author is hired or sanctioned by the biographee, optics matter even more) and not to give the historical truth. I think this is well illustrated in the fact that Newton's story of the falling apple is completely made up - about 20 years after he published his Principia Mathematica. And why? Because Newton realized that it was a great narrative and boy was he right.

+100

[giofranchi]

History as it happens is interestiing. But history is almost never told as it happens and that's the danger of it. Complexities and messiness wither away, the loser's tale gets lost and later people interpret it with the eyes of another time with a different set of moral and scientific axioms and ideologies. It gets fitted into a nice narrative which suits a specific implicit or explicit agenda.

 

This always fascinates me when I read a biography. Who told the author this and why? What's in the interest of the author? To write a readable story which sells (and in the case in which the author is hired or sanctioned by the biographee, optics matter even more) and not to give the historical truth. I think this is well illustrated in the fact that Newton's story of the falling apple is completely made up - about 20 years after he published his Principia Mathematica. And why? Because Newton realized that it was a great narrative and boy was he right.

+100

 

It might very well be so, although I don’t necessarily believe that, and I am going to explain why. Anyhow, even if it were so, ask yourself the following: “What do I prefer? To be lost at sea, in a dark night, with a completely starless sky, and without compass at all. Or to be lost at sea, in a dark night, with a completely starless sky, but having a compass, although not a very precise one?”

Of course, the answer depends very much on what “not a very precise one” means: if it points south, better to be without compass at all! Vice versa, if it gives you a general idea of where the north is located, even if it errs by some degrees, well, then I would certainly prefer to have that compass. By itself it won’t save me, good judgment and sound reasoning on my part will always be required, but it will provide some help.

Now, why do I think that history might err by some degrees, but doesn’t point south? The answers lies in the so-called “LINDY EFFECT”, that Mr. Taleb describes in his book “Antifragile”:

COMPARATIVE LIFE EXPECTANCY: the old is expected to stay longer than the young in proportion to their age; DOMAIN: non-perishable informational: life of intellectual production, lifetime of genera.

This basically means the probability a book, that has been around for 2000 years, will still be relevant 2000 years from now is the same of the probability a book, that has been around for 10 years, will still be relevant 10 years from now.

If you think of it carefully, biographies are only “gates” to a knowledge that has been around for much much longer. “Keynes 1883-1946: Economist, Philosopher, Statesman” is a gate to “The General Theory of Employment, Interest, and Money”, “The Einstein of Money” is a gate to “Security Analysis”, “Prophet of Innovation: Joseph Schumpeter and Creative Destruction” is a gate to “History of Economic Analysis”, “The Life of Adam Smith” is a gate to “The Wealth of Nations” (ok, “The Wealth of Nations” doesn’t need any gate at all!), “Benjamin Franklin, An American Life” is a gate to “Poor Richard Almanack” and his own autobiography, etc.

I can already see a new Warren Buffett biography 100 years from now, that will be the gate to his shareholder letters, and I guess the content of those letters will still be very relevant!

So, the biographies might be flawed. I agree, no doubt about that. But, if you dig deeper, if you go where those biographies might ultimately lead, there is much more robust and thus enduring material to be studied and to be used as a guide.

 

giofranchi

[Guest valueInv]

History as it happens is interestiing. But history is almost never told as it happens and that's the danger of it. Complexities and messiness wither away, the loser's tale gets lost and later people interpret it with the eyes of another time with a different set of moral and scientific axioms and ideologies. It gets fitted into a nice narrative which suits a specific implicit or explicit agenda.

 

This always fascinates me when I read a biography. Who told the author this and why? What's in the interest of the author? To write a readable story which sells (and in the case in which the author is hired or sanctioned by the biographee, optics matter even more) and not to give the historical truth. I think this is well illustrated in the fact that Newton's story of the falling apple is completely made up - about 20 years after he published his Principia Mathematica. And why? Because Newton realized that it was a great narrative and boy was he right.

+100

 

It might very well be so, although I don’t necessarily believe that, and I am going to explain why. Anyhow, even if it were so, ask yourself the following: “What do I prefer? To be lost at sea, in a dark night, with a completely starless sky, and without compass at all. Or to be lost at sea, in a dark night, with a completely starless sky, but having a compass, although not a very precise one?”

Of course, the answer depends very much on what “not a very precise one” means: if it points south, better to be without compass at all! Vice versa, if it gives you a general idea of where the north is located, even if it errs by some degrees, well, then I would certainly prefer to have that compass. By itself it won’t save me, good judgment and sound reasoning on my part will always be required, but it will provide some help.

Now, why do I think that history might err by some degrees, but doesn’t point south? The answers lies in the so-called “LINDY EFFECT”, that Mr. Taleb describes in his book “Antifragile”:

COMPARATIVE LIFE EXPECTANCY: the old is expected to stay longer than the young in proportion to their age; DOMAIN: non-perishable informational: life of intellectual production, lifetime of genera.

This basically means the probability a book, that has been around for 2000 years, will still be relevant 2000 years from now is the same of the probability a book, that has been around for 10 years, will still be relevant 10 years from now.

If you think of it carefully, biographies are only “gates” to a knowledge that has been around for much much longer. “Keynes 1883-1946: Economist, Philosopher, Statesman” is a gate to “The General Theory of Employment, Interest, and Money”, “The Einstein of Money” is a gate to “Security Analysis”, “Prophet of Innovation: Joseph Schumpeter and Creative Destruction” is a gate to “History of Economic Analysis”, “The Life of Adam Smith” is a gate to “The Wealth of Nations” (ok, “The Wealth of Nations” doesn’t need any gate at all!), “Benjamin Franklin, An American Life” is a gate to “Poor Richard Almanack” and his own autobiography, etc.

I can already see a new Warren Buffett biography 100 years from now, that will be the gate to his shareholder letters, and I guess the content of those letters will still be very relevant!

So, the biographies might be flawed. I agree, no doubt about that. But, if you dig deeper, if you go where those biographies might ultimately lead, there is much more robust and thus enduring material to be studied and to be used as a guide.

 

giofranchi

 

The problem is when you have a faulty compass, you typically don't know how faulty or even that it is faulty. That gives you a false sense of confidence causing you to make bigger mistakes. At least when you don't hav a compass, you know you're lost and take the appropriate action. I have seen this behavior over and over again, especially among investors.

 

You should read a book called "Management Rewired". He talks about how stories are the best way to convince people, since it gets the mind to suspend logical thinking. On the other hand, if you try to convince them through logic and arguments, it engages their analytical mind and makes them more resistant to your idea.

[giofranchi]

The problem is when you have a faulty compass, you typically don't know how faulty or even that it is faulty. That gives you a false sense of confidence causing you to make bigger mistakes. At least when you don't hav a compass, you know you're lost and take the appropriate action. I have seen this behavior over and over again, especially among investors.

 

You should read a book called "Management Rewired". He talks about how stories are the best way to convince people, since it gets the mind to suspend logical thinking. On the other hand, if you try to convince them through logic and arguments, it engages their analytical mind and makes them more resistant to your idea.

 

Thank you valueInv,

I have just purchased “Management Rewired”, and I will surely read it! Actually, I am well aware of the fact that stories might be dangerous and misleading. But stories are not history. I remember Mr. Rodriguez saying that at the beginning of his career he had the chance to ask Mr. Munger three things that would help him improve his skills as an investor the most. And Mr. Munger replied: “Study history, study history, study history”. Don’t study what historians say or write. Instead, study what the great minds of the past might still have to teach us. I mean, if you read Seneca, whose writings are still relevant after 2000 years, how faulty can your compass be? And, by the way, he not only was the greatest philosopher of ancient Rome, but also the richest man of his time!  8)

 

giofranchi

 

[giofranchi]

The problem is when you have a faulty compass, you typically don't know how faulty or even that it is faulty. That gives you a false sense of confidence causing you to make bigger mistakes. At least when you don't hav a compass, you know you're lost and take the appropriate action. I have seen this behavior over and over again, especially among investors.

 

You should read a book called "Management Rewired". He talks about how stories are the best way to convince people, since it gets the mind to suspend logical thinking. On the other hand, if you try to convince them through logic and arguments, it engages their analytical mind and makes them more resistant to your idea.

 

Thank you valueInv,

I have just purchased “Management Rewired”, and I will surely read it! Actually, I am well aware of the fact that stories might be dangerous and misleading. But stories are not history. I remember Mr. Rodriguez saying that at the beginning of his career he had the chance to ask Mr. Munger three things that would help him improve his skills as an investor the most. And Mr. Munger replied: “Study history, study history, study history”. Don’t study what historians say or write. Instead, study what the great minds of the past might still have to teach us. I mean, if you read Seneca, whose writings are still relevant after 2000 years, how faulty can your compass be? And, by the way, he not only was the greatest philosopher of ancient Rome, but also the richest man of his time!  8)

 

giofranchi

 

Take, for instance, the Q4 2012 Hoisington Review and Outlook. Dr. Lacy Hunt draws 7 conclusions about fiscal economics and the growth problem, reaching as far back as David Hume, leader of the Enlightenment in 1752, and David Ricardo, originator of the law of comparative advantage and diminishing marginal returns in 1821.

If Hume’s and Ricardo’s thinking is still relevant after more than two centuries, how faulty can Dr. Hunt’s compass be? I guess very little.

 

giofranchi

[Packer16]

Another way to look at it is you don't need an accurate compass just one that is more accurate than other market participants.  The one thing that looking at history provides is a record of the emotional/sentiment aspect of investing that is not quantifiable from valuation models.  I find utilizing the micro aspect of history (companies, securities and industries) to be more useful than the macro, as the macro has so many moving pieces.

 

Packer

[biaggio]

The problem is when you have a faulty compass, you typically don't know how faulty or even that it is faulty. That gives you a false sense of confidence causing you to make bigger mistakes. At least when you don't hav a compass, you know you're lost and take the appropriate action. I have seen this behavior over and over again, especially among investors.

 

You should read a book called "Management Rewired". He talks about how stories are the best way to convince people, since it gets the mind to suspend logical thinking. On the other hand, if you try to convince them through logic and arguments, it engages their analytical mind and makes them more resistant to your idea.

 

Thank you valueInv,

I have just purchased “Management Rewired”, and I will surely read it! Actually, I am well aware of the fact that stories might be dangerous and misleading. But stories are not history. I remember Mr. Rodriguez saying that at the beginning of his career he had the chance to ask Mr. Munger three things that would help him improve his skills as an investor the most. And Mr. Munger replied: “Study history, study history, study history”. Don’t study what historians say or write. Instead, study what the great minds of the past might still have to teach us. I mean, if you read Seneca, whose writings are still relevant after 2000 years, how faulty can your compass be? And, by the way, he not only was the greatest philosopher of ancient Rome, but also the richest man of his time!  8)

 

giofranchi

 

Gio, funny you should mention Seneca- I am just halfway reading the book "Letters from a Stoic" - apparently a classic english translation of the writings of Seneca. I don t normally read this type of book, but I am finding it useful to balance all the things that we worry about here and puts life in perspective.

[giofranchi]

The problem is when you have a faulty compass, you typically don't know how faulty or even that it is faulty. That gives you a false sense of confidence causing you to make bigger mistakes. At least when you don't hav a compass, you know you're lost and take the appropriate action. I have seen this behavior over and over again, especially among investors.

 

You should read a book called "Management Rewired". He talks about how stories are the best way to convince people, since it gets the mind to suspend logical thinking. On the other hand, if you try to convince them through logic and arguments, it engages their analytical mind and makes them more resistant to your idea.

 

Thank you valueInv,

I have just purchased “Management Rewired”, and I will surely read it! Actually, I am well aware of the fact that stories might be dangerous and misleading. But stories are not history. I remember Mr. Rodriguez saying that at the beginning of his career he had the chance to ask Mr. Munger three things that would help him improve his skills as an investor the most. And Mr. Munger replied: “Study history, study history, study history”. Don’t study what historians say or write. Instead, study what the great minds of the past might still have to teach us. I mean, if you read Seneca, whose writings are still relevant after 2000 years, how faulty can your compass be? And, by the way, he not only was the greatest philosopher of ancient Rome, but also the richest man of his time!  8)

 

giofranchi

 

Gio, funny you should mention Seneca- I am just halfway reading the book "Letters from a Stoic" - apparently a classic english translation of the writings of Seneca. I don t normally read this type of book, but I am finding it useful to balance all the things that we worry about here and puts life in perspective.

 

biaggio,

I find that book to be a wonderful reading! And I would suggest it to anyone. Actually, I don’t understand why any book should be preferred to “Letters from a Stoic”… I agree with Packer that the micro aspect of history is always more useful that the macro aspect. But we should be aware of two components here: intellect and temperament. The micro and the macro aspects of history are intellect, Seneca (and others) is temperament. If we don’t invest some time in nurturing our temperament, we might be missing something very important: under certain circumstances, temperament might be even more important than intellect.  ;)

 

giofranchi

[Packer16]

I agree.  I think Mark's book (The Most Important Thing) is about the best book on temperament I have read yet.  Maybe that is why I have re-read it many times.  It is putting temperament theory into practice that is the fun part.

 

Packer

[biaggio]

If one wants to work on their temperament, Letters from a Stoic would be a great read. The great thing is that it is transferable to all parts of one's life.

 

Have read Mark's book + agree as well.(also found it much easier to read)

[giofranchi]

I agree.  I think Mark's book (The Most Important Thing) is about the best book on temperament I have read yet.  Maybe that is why I have re-read it many times.  It is putting temperament theory into practice that is the fun part.

 

Packer

 

I will borrow from valueInv: +100  ;D ;D

 

giofranchi

[Guest valueInv]

The problem is when you have a faulty compass, you typically don't know how faulty or even that it is faulty. That gives you a false sense of confidence causing you to make bigger mistakes. At least when you don't hav a compass, you know you're lost and take the appropriate action. I have seen this behavior over and over again, especially among investors.

 

You should read a book called "Management Rewired". He talks about how stories are the best way to convince people, since it gets the mind to suspend logical thinking. On the other hand, if you try to convince them through logic and arguments, it engages their analytical mind and makes them more resistant to your idea.

 

Thank you valueInv,

I have just purchased “Management Rewired”, and I will surely read it! Actually, I am well aware of the fact that stories might be dangerous and misleading. But stories are not history. I remember Mr. Rodriguez saying that at the beginning of his career he had the chance to ask Mr. Munger three things that would help him improve his skills as an investor the most. And Mr. Munger replied: “Study history, study history, study history”. Don’t study what historians say or write. Instead, study what the great minds of the past might still have to teach us. I mean, if you read Seneca, whose writings are still relevant after 2000 years, how faulty can your compass be? And, by the way, he not only was the greatest philosopher of ancient Rome, but also the richest man of his time!  8)

 

giofranchi

 

I differentiate between principles taught by people who came before us and history. Obviously, we wouldn't have much of a framework to base our decisions if we didn't understand the underlying principles. So I am going to confine my discussion to history.

 

Regarding history, I have seen history being used to many time as a substitute for analysis. People say situation x is like situation y, therefore their outcome will be the same. Problem is that the outcome of any situation is a product of the weighted influence of possibly hundreds of variables, many of which are not visible to you.

So you are trying to predict the outcome based on say 4 or 5 variables, of which you  don't even know the weights of the variables. Throw history into the mix and the problem gets more complicated, because the further you go back in time, the less reliable the data available on the variables.

 

 

Not only is the data less reliable, the study of history has the problem of drawing the right conclusions based on partial data and less reliable data. Your analysis skills need to be much sharper to analyze that set of data vs the set of data available for the present. If you had those skills, you'll be more productive analyzing the present.

 

I would rather study as many variables as possible and use first principles to predict a probabilistic outcome. History does have its uses, but you need to understand its limitations first.

 

   

[giofranchi]

I differentiate between principles taught by people who came before us and history. Obviously, we wouldn't have much of a framework to base our decisions if we didn't understand the underlying principles. So I am going to confine my discussion to history.

 

Regarding history, I have seen history being used to many time as a substitute for analysis. People say situation x is like situation y, therefore their outcome will be the same. Problem is that the outcome of any situation is a product of the weighted influence of possibly hundreds of variables, many of which are not visible to you.

So you are trying to predict the outcome based on say 4 or 5 variables, of which you  don't even know the weights of the variables. Throw history into the mix and the problem gets more complicated, because the further you go back in time, the less reliable the data available on the variables.

 

 

Not only is the data less reliable, the study of history has the problem of drawing the right conclusions based on partial data and less reliable data. Your analysis skills need to be much sharper to analyze that set of data vs the set of data available for the present. If you had those skills, you'll be more productive analyzing the present.

 

I would rather study as many variables as possible and use first principles to predict a probabilistic outcome. History does have its uses, but you need to understand its limitations first.

 

 

 

And what are first principles? I guess they are the ones which have stood the test of time. The longer a principle has been around, the longer, you may be confident, it will continue to stay around. And that is the best definition of first principle I can think of (beside, of course, a truth sent by God Itself…! ;) ). That’s my idea of history: to study and understand which principles have withstood the test of time, and, if a probabilistic outcome implies that those principles will no longer be true tomorrow, to bet against such an outcome. I believe you will be far more right than wrong.

 

giofranchi

[giofranchi]

I differentiate between principles taught by people who came before us and history. Obviously, we wouldn't have much of a framework to base our decisions if we didn't understand the underlying principles. So I am going to confine my discussion to history.

 

Regarding history, I have seen history being used to many time as a substitute for analysis. People say situation x is like situation y, therefore their outcome will be the same. Problem is that the outcome of any situation is a product of the weighted influence of possibly hundreds of variables, many of which are not visible to you.

So you are trying to predict the outcome based on say 4 or 5 variables, of which you  don't even know the weights of the variables. Throw history into the mix and the problem gets more complicated, because the further you go back in time, the less reliable the data available on the variables.

 

 

Not only is the data less reliable, the study of history has the problem of drawing the right conclusions based on partial data and less reliable data. Your analysis skills need to be much sharper to analyze that set of data vs the set of data available for the present. If you had those skills, you'll be more productive analyzing the present.

 

I would rather study as many variables as possible and use first principles to predict a probabilistic outcome. History does have its uses, but you need to understand its limitations first.

 

 

 

And what are first principles? I guess they are the ones which have stood the test of time. The longer a principle has been around, the longer, you may be confident, it will continue to stay around. And that is the best definition of first principle I can think of (beside, of course, a truth sent by God Itself…! ;) ). That’s my idea of history: to study and understand which principles have withstood the test of time, and, if a probabilistic outcome implies that those principles will no longer be true tomorrow, to bet against such an outcome. I believe you will be far more right than wrong.

 

giofranchi

 

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.

- Cicero, 55 BC

 

I guess those are first priciples.

 

giofranchi

[Guest valueInv]

I differentiate between principles taught by people who came before us and history. Obviously, we wouldn't have much of a framework to base our decisions if we didn't understand the underlying principles. So I am going to confine my discussion to history.

 

Regarding history, I have seen history being used to many time as a substitute for analysis. People say situation x is like situation y, therefore their outcome will be the same. Problem is that the outcome of any situation is a product of the weighted influence of possibly hundreds of variables, many of which are not visible to you.

So you are trying to predict the outcome based on say 4 or 5 variables, of which you  don't even know the weights of the variables. Throw history into the mix and the problem gets more complicated, because the further you go back in time, the less reliable the data available on the variables.

 

 

Not only is the data less reliable, the study of history has the problem of drawing the right conclusions based on partial data and less reliable data. Your analysis skills need to be much sharper to analyze that set of data vs the set of data available for the present. If you had those skills, you'll be more productive analyzing the present.

 

I would rather study as many variables as possible and use first principles to predict a probabilistic outcome. History does have its uses, but you need to understand its limitations first.

 

 

 

And what are first principles? I guess they are the ones which have stood the test of time. The longer a principle has been around, the longer, you may be confident, it will continue to stay around. And that is the best definition of first principle I can think of (beside, of course, a truth sent by God Itself…! ;) ). That’s my idea of history: to study and understand which principles have withstood the test of time, and, if a probabilistic outcome implies that those principles will no longer be true tomorrow, to bet against such an outcome. I believe you will be far more right than wrong.

 

giofranchi

 

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.

- Cicero, 55 BC

 

I guess those are first priciples.

 

giofranchi

 

 

Would Keynes agree?

[Guest valueInv]

Here's an example of substituting history for analysis:

 

http://brooklyninvestor.blogspot.com/2012/12/apple-is-no-polarioid-but.html

 

 

[giofranchi]

I differentiate between principles taught by people who came before us and history. Obviously, we wouldn't have much of a framework to base our decisions if we didn't understand the underlying principles. So I am going to confine my discussion to history.

 

Regarding history, I have seen history being used to many time as a substitute for analysis. People say situation x is like situation y, therefore their outcome will be the same. Problem is that the outcome of any situation is a product of the weighted influence of possibly hundreds of variables, many of which are not visible to you.

So you are trying to predict the outcome based on say 4 or 5 variables, of which you  don't even know the weights of the variables. Throw history into the mix and the problem gets more complicated, because the further you go back in time, the less reliable the data available on the variables.

 

 

Not only is the data less reliable, the study of history has the problem of drawing the right conclusions based on partial data and less reliable data. Your analysis skills need to be much sharper to analyze that set of data vs the set of data available for the present. If you had those skills, you'll be more productive analyzing the present.

 

I would rather study as many variables as possible and use first principles to predict a probabilistic outcome. History does have its uses, but you need to understand its limitations first.

 

 

 

And what are first principles? I guess they are the ones which have stood the test of time. The longer a principle has been around, the longer, you may be confident, it will continue to stay around. And that is the best definition of first principle I can think of (beside, of course, a truth sent by God Itself…! ;) ). That’s my idea of history: to study and understand which principles have withstood the test of time, and, if a probabilistic outcome implies that those principles will no longer be true tomorrow, to bet against such an outcome. I believe you will be far more right than wrong.

 

giofranchi

 

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.

- Cicero, 55 BC

 

I guess those are first priciples.

 

giofranchi

 

 

Would Keynes agree?

 

I truly believe Keynes was a much much much greater fiscal conservative than a lot of people believe, or pretend to believe. What it is currently sold for Keynes’s school of thought or Keynes’s economic ideas is deeply flawed and, probably, only a mean to justify incompetence and “kick the can down the road” policies.

But let’s assume Keynes was only about deficit spending (regardless of whether it occurs in economic expansion or contraction) and money printing (he clearly was not, but let’s pretend it anyway…): if you ask me whether I would choose Keynes or Cicero, I would bet on Cicero 100% of the times. If Keynes is still studied 2000 years from now, then I might change opinion!

 

giofranchi

[LC]

Excellent arguments gio. I am enjoying your posts more and more as I read them.

[Guest valueInv]

 

I truly believe Keynes was a much much much greater fiscal conservative than a lot of people believe, or pretend to believe. What it is currently sold for Keynes’s school of thought or Keynes’s economic ideas is deeply flawed and, probably, only a mean to justify incompetence and “kick the can down the road” policies.

But let’s assume Keynes was only about deficit spending (regardless of whether it occurs in economic expansion or contraction) and money printing (he clearly was not, but let’s pretend it anyway…): if you ask me whether I would choose Keynes or Cicero, I would bet on Cicero 100% of the times. If Keynes is still studied 2000 years from now, then I might change opinion!

 

giofranchi

 

Why do you believe that about Keynes? Why are other people getting it wrong?

 

BTW, Cicero is known more for rhetoric - not quite conducive to analytical thinkning.

Why do you believe that?

[Sportgamma]

 

Why do you believe that about Keynes? Why are other people getting it wrong?

 

Perhaps one of the reason: "[Keynes] was vastly smarter than people who write for the Times and say that Keynes said something."

- Taleb at GoogleTalks

 

Its a great talk by the way:

 

(He covers the Lindy effect as well)