"To know that I do not know what I know, and that I do not know what I do not know…that is true knowledge. -Confucius
One of the areas I particularly enjoy exploring is our fallibility as a species. Humans are not only bad at understanding our own minds, but we have a problem even recognizing where we may be ignorant or lacking.
This is peculiarly relevant for investors and traders.
What started me thinking about this today was an Op/Ed by Richard Fortey, senior paleontologist at the Natural History Museum in London, about natural disasters, Blind to the End:
"Human beings are never prepared for natural disasters. There is a kind of optimism built into our species that seems to prefer to live in the comfortable present rather than confront the possibility of destruction. It may happen, we seem to believe, but not now, and not to us. There is nothing new in this attitude."
Altough Fortey is referring to natural disasters, he could just as easily ahve been referencing the mindset of investors. All too often, their portfolios seem to get
blindsided by wholly unexpected events, rather
than anticipated problems. (I’ve addressed this in the past: Folly of Forecasting, Know Thyself, and Expect to Be Wrong).
In other words, we have a blindspot for our own blindspots.
Taleeb Nassim’s "Fooled by Randomness" refers to these dislocations as Black Swan events. Despite their regular occurences — be it market crashes or earthquakes — we tend to think of them (if we think of them at all) as far rarer than they actually are.
That’s due or our sense of time and place. I’ve noted in the past the issue of time scale and market cycles. We have a problem thinking in terms of millenia, centuries, or even in years. Fortey makes specific reference to this, observing:
"The time-scale is our conceptual problem. Tectonic events happen on a scale of hundreds to millions of years. Most humans find it hard to think beyond the life spans of their grandchildren. There is a psychological fault line between the human and the natural calibration of the world. Incomprehension fosters a kind of rose-tinted amnesia. If anything, the comparative comfort of modern (at least Western) life makes disasters the more unthinkable. We don’t want to know."
All this relates back to my bearish call for 2006. What I plan to do this week, as a ramp up to a fuller exposition on the subject, is map out several different longer term historical views. These charts may shed some insight into why a dislocation — a "Black Swan event" — is increasingly likely.
It also reveals why the long term is so challenging for people to intuitively grasp — its simply not in our nature.
Blind to the End
NYT, December 26, 2005
Blaise Pascal (1623–1662):
Nec me pudet, ut istos, fateri nescire quid nesciam
(“I am not ashamed, as your friends are, to confess that I do not know what I do not know.”)
Clarence Darrow, during the Scopes Monkey Trial:
"Science gets to the end of its knowledge and, in effect, says, ‘I do not know what I do not know,‘ and keeps on searching. Religion gets to the end of its knowledge, and in effect, says, ‘I know what I do not know,’ and stops searching.