The magic of error correcting
Topic: There will be problems
Discussion: Soluble problems are the rule
Conclusion: Error correcting is key to all decision making, not least investments, albeit unfortunately largely ignored in political areas such as public governance and big finance. Certain gender equality issues make for an interesting side-show.
The scientific method has brought humanity previously unimaginable wealth and possibilities. Its most important feature is that of systematic review, critique and improvement, also known as the system of effective error correcting. Here is an example:
- Before Newton things fell to the ground just because they always had. God was probably thought to be the ultimate cause.
- Then Newton came up with the idea of gravity, a force that increased with mass and diminished with distance.
- Then Einstein inched closer to reality with his theory of explaining the behavior of massive objects. Without forces, but still increasing with mass and diminishing with distance, i.e. on the surface diametrically opposite from Newton’s theory, but at a deeper level explaining the same phenomenon with the same key variables.
- In the future, a unified theory of quantum mechanics and general relativity will still show how reality relates bodies according to size and distance but with yet a better explanation as to how it really works.
That’s how science make use of error correction through openness and peer review.
Each explanation solves a problem, but each explanation only approaches reality without ever getting there completely (for that, it most likely takes the entire universe of space and time). Scrutiny and correction, as well as theorizing, reasoning and experimentation are key to this process; as opposed to authority, selective perception and ad hoc explanations.
The same method would be well-advised for politics and investments (not to mention all other decision management areas)
Investing error correction
The scientific method is most straight forward implemented in the world of investing:
You “simply” patiently and unemotionally record how and why you enter an investment. Then you analyze what went respectively right and wrong, and adjust your method accordingly for the next time. I’ve detailed my views on this in my TAOS series here; and there is an accompanying artwork available here (quite luxurious and expensive I might add, but with a 20% Black Friday discount: Use code invest2018 at checkout).
Record – Analyze – Adjust
There are two slight problems. One is that markets are governed by human psychology, causing changing correlations between fundamentals and valuations (exacerbating the small speed bump [irony] of estimating probabilities of future events). The other is that every individual investor has trouble controlling his own emotions, thus occasionally succumbing to greed, fear, lack of patience and diverging from his own strategy.
I have myself often fallen prey to hubris after a lucky streak (see one of my TAOS entries: Temperateness), or taken too little risk after a losing streak. Well, the weakness of the human psyche is a problem in itself. A soluble problem, a problem that can be remedied through error correction. It just needs to be recognized, analyzed and fixed.
Politics is another decision making problem with some elements of error correction. It has taken us from warlords and despots to democracy. It has taken us from slavery and only free white men allowed a vote, to a system unbiased against gender, incarceration or race. It seems politics, just as science asymptotically approaches reality, is slowly inching toward a just and effective system.
However, the system of representative democracy has many drawbacks, some based on Arrow’s decision paradox*, other on the mechanics of representation itself. The worst problems are due to the power it instills the third and fourth largest parties and the resulting frequent compromises between parties and ideas.
* In reality neither voters’ preferences, nor the set of choices/solutions are as fixed as in Arrow’s impossibility theorem, but subject to debate and evolution, which in reality nullifies Arrow’s no-go theorem of public choice.
The coalitions, compromises and disproportional power awarded to small parties unfortunately mean voters don’t really know what they’re voting for, and parties and voters don’t take full or any responsibility for muddled “averaged out” decisions. Therefore the system of error correction is all but neutered in a system of representative democracy without an early cut-off point for smaller parties.
In chapter 13 in his book “The beginning of infinity”, David Deutsch explains how the plurality voting system often can fix most of these problems by awarding the power to just one clear winner, a winner that will thus get more power to implement its ideas (‘scientific’ political experiments meant to find the ‘truth’ of most effective governance) but also have to take full responsibility for the outcome and the judgment of voters in the next election.
Now, that would be putting the scientific method to good use — not in exactly all situations and countries, as Deutsch is quick to point out, but in many.
Examples of the opposite: moral hazard in finance
Banks and big finance: moral hazard, private profits and public losses. Errors and excessive risk taking are rewarded instead of corrected — quite the opposite of the scientific method and thus the financial system over time becomes prone to ever larger errors and periodic melt-downs.
Look for errors everywhere
Investing as well as various aspects of governance (of states and companies) can be said to be on a quest for an (effective) and sustainable ‘truth’ through experimentation and variation — just as science is. The financial system is worse off and the overall system of representative democracy is at the moment a lost cause.
An interesting side show is going on in the female board representation area. For a while, compliant companies performed better on the stock market, perhaps signaling temporary progress that clients and investors picked up on, and thus caused better performance for a while.
It might actually have been a step toward the truth at the time, but is now overplayed, since one-variable investment strategies typically never work long-term.
Going forward, broader initiatives within CSR/ESG show greater potential as they represent more long term economic investments and truths, incorporating previously ignored externalities, whereas feminist governance initiatives only signaled a will to do better but without an effective method based on facts.
For now, as individuals, we’ll just have to make due with what we can control — our investments. Well, and all other decision-related areas in everyday life, e.g., regarding the choice of friends, relationsships, jobs, running, strength training, bodybuilding, food choices and so on.
There will be problems. In fact, problems are our friends, our sign posts.
But they are soluble. Find them, embrace them and correct them. That is the way toward an effective future governed by truth.
Happy hunting (for errors)!