Soros is famous for his quote “Invest first, investigate later”. It flies in the face of received investment wisdom, which says you’ve got to collect lots of facts, come up with a valuation, and then buy if the price being offered is less than appraised valuation. It’s all very manly stuff with a heavy Christian Work Ethic. Soros seems to adopt a more “feminine” approach. If the idea sounds good, then he’ll invest, especially when he’s at the early stage of a potential trend. Later, if he thinks the idea wasn’t that good, he sells.
There’s an interesting Youtube video by Gigenrenzer on “Simple heurists that make us smart”. (). He asserts that there are two sorts of systems: systems in which probabilities are known, and systems where they are unknown.
3:37: RISK: “How should we make decisions when all relevant
alternatives, consequences, and probabilities are known? — Requires statistical thinking”. UNCERTAINTY: “How should we make decisions when not all alternatives, consequences, and probabilities are known? — Requires smart rules of thumb (heuristics) and intuition”
He said that there are dangers of applying systems that work for risk and employing them to uncertain systems.
1. UNCERTAINTY The best decisions under risk is not the best decision under uncertainty
2. HEURISTICS Heuristics are indispensable for good decisions under uncertainty. They are not the product of a flawed mental system 3. SIMPLICITY Complex problems do not require complex solutions 4. LESS-IS-MORE More information, time, and computation is not always better (the George Soros quote really strikes a bell here). You see this problem all the time in investing, where more facts are equated with better decision-making. Despite this, behavioural economists have noted that having more information often leads to worse decisions.
5:43 How does an outfielder catch a ball in baseball?
Answer: one solution is that he doesn’t solve calculus, he would use a simple heuristic: start running, look for the ball, and then stare with your head at a fixed angle. Run so that the ball is in the centre of view. You will converge on the ball.
9:23 Heuristics can be used “deliberately”, so don’t believe the presumption that “statistical thinking is conscious, heuristics are unconscious”.
11:05 This one will please Taleb (IIRC Taleb is very familiar with Gigenrenzer’s work) and displease Greenspan (who boasted that quantuum physics was easier than economics): “The theory of finance is [was] part of the problem .. not its solution”. Why? Because it’s a theory about risk which was applied to a world of uncertainty.
I also watched another video recently: “Tim Ewald – Clojure: Programming with Hand
Tools” (https://www.youtube.com/watch?v=ShEez0JkOFw). He is a programmer with the hobby of woodworking. The video is rather long and not all that illuminating from a general viewpoint. He was exploring the relationship between the two subjects. His basic premise is that programming, like woodworking, can be done at an artisanal level, or an automated basis. It’s the difference between Gordon Ramsey’s cooking, and MacDonalds. Ramsey is easily surpassed in terms of volume, yet in terms of quality, Ramsey is far better. The Ramsey equivalence in woodworking is Chippendales. The other side of the analogy is mass-production machining. The products are usually inferior because they are done with an eye to economy, and often have to sacrifice superior design to more easily conform to machine requirements. The example he gave was the outside panels on doors. Hand-crafted doors have mortice and tenon joins, which are inherently stronger than the grooving method produced by machine tools.
It is, of course, the Chippendale furniture that people ultimately seek.
One fundamental difference between Chippendale furniture – other than the quality, of course – is that Chippendale furniture is often constructed “by proportion”, whilst mass-produced furniture is “by measurement”.
That is to say that when you mass-produce something, you need a complete breakdown of the components by number, and dimensions. In other words, everything is measured.
Contrast this with a Chippendale catalogue contemporary of its time. The catalogue contained drawings of the item, but no dimensions. Huh, how is that possible? Well, since all Chippendale furniture is hand-made, the drawing is scaled up to whatever size the customer wanted. To the craftsmen building book cases, or whatever, a 15′ alcove is the same as a 10′ alcove. They basically just scale the design up to whatever alcove you have.
Woodworkers have an interesting, and very simple tool, called a sector. It is two pieces of wood, hinged together, with markings at equal intervals. Very very basic. The whole thing works on very simple mathematics: congruent triangles, and you don’t perform any
calculations. Mathematics without calculations? This video explains how it works: http://is.gd/L320gr
This struck me as having similarities to investing. Soros is using the Chippendale proportional, heuristic approach, whereas most of us are using the calculus machining approach.
Happy investing to you all.