Experience, Rare Events and Risky Choice

Choice, Education and Experience

Decision making, the challenge of choice, is often discussed as though it’s a single, invariant type of event.  Perhaps this is most strongly presented in the idea of stable preferences, the idea that if we choose to eat the fish at a restaurant one day then we should choose it the next day as well, always assuming we liked it.  People don’t actually behave like this, and decision making is much more complex than economics often makes out.

However, we can roughly divide our choice processes into two – decisions we make from personal experience and decisions we make from education.  We may invest in banks because we've had a good experience doing so, but we may choose to limit our investments based on third-party knowledge that financial institutions are inherently risky.  But how we decide which model to follow can change the course of our lives; and certainly determine the health of our wealth.

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Invert, Always Invert

I Wouldn't Start From Here

“All I want to know is where I’m going to die, so I’ll never go there” – Charlie Munger

Carl Gustav Jacob Jacobi was a nineteenth century mathematician famous for his work on elliptic functions, amongst other accomplishments.  Oddly he ends up being frequently quoted by Charlie Munger and Warren Buffett, despite having no known connection with the investment world.

Jacobi's great contribution to investor thinking was his maxim “man muss immer umkehren”: invert, always invert.  Of course, Jacobi was actually making a statement about mathematics, not investment thinking, but we shouldn’t much care where we get our models from, as long as they have the distinct advantage of being useful.

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A Liberal Arts Investor’s Reading List

A Little Wisdom Goes A Long Way

These days it’s hard to actually see out of the thicket of new books on the topic behavioral finance, a deluge inversely proportional to the actual impact of behavioral economics on the real world, other than through the dubious delights of default choice. And, of course, I'm adding to the bonfire with my own review of the subject in Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias.

If we think a bit wider, though, as a liberal arts investor, there are a few books people shouldn't die not having read. Following Charlie Munger’s dictum :

“Wisdom acquisition is a moral duty. It’s not something you do just to advance in life. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know.”

So here, in no particular order, are the books I go back to again and again.

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