A Twitter thread by Jim OShaughnessy.
1/ The Tao Can Help You When Contemplating The Dow—Part 4 of an occasional series using Taoist wisdom to help you invest better
I've been reading "Quantum Psychology: How Brain Software Programs You and Your World" by Robert Anton Wilson and he included a Taoist fable
2/ that I often used to describe how fundamental attribution error can lead us truly astray and cause us to make huge mistakes with our investment choices. Let's first look at the fable and then dive into how it illustrates the many quirks of our minds can cause havoc to
3/ making optimal choices. Let's start with the fable:
One day, an old Chinese farmer noticed that his coin person had gone missing. Although he searched everywhere for the purse, he couldn't find it and so he became convinced that it had been stolen. Giving thought to what
4/ non-family members had visited his farm over the last week, he decided that the son of the farmer who lived next door was the thief. He was the only person who had been in the farmer's home alone, after which his purse had gone missing.
5/ The next time he saw the boy, he noticed that the boy's behavior seemed extremely guilty. Staring at the boy, the farmer concluded that his every mannerism exuded guilt, as he wouldn't look the farmer in the eye, skulked away and wouldn't make direct eye contact with the
6/ farmer. Because he lacked proof, the farmer didn't know what to do but each time he saw the boy, he grew angrier and more certain that the boy was a thief. He finally decided to confront the boy's father, accusing his son of the theft. Just as he was walking out the door
7/ the farmer's wife called to him and said "look, I found your coin purse behind the bed!" As he heard his wife, he again saw the boy walking down the road, but this time, all he saw was an innocent young man going to the fishing hole.
8/ there are several lessons we can learn from this fable.
The first is, our perceptions often create our reality and inform our beliefs so strongly that we begin a downward spiral of reinforcing something that we are *certain* are true, even when they are not. Think of the
9/ last time you were *certain* the market was going to drop or that a particular stock *had* to double and reflect back on the farmer's certainty that the boy was a thief. As my hero Richard Feynman says "make sure not to fool yourself and you are the easiest person to fool.
10/ The second is we see what we want to see. Our perception trumps everything to the point of us seeing things that really aren't there. "I know that guy is a crook" or "i know this guru is the real deal" are beliefs that, once held, only reinforce themselves.
11/ Our mind's try to make the real world comport with our beliefs about it. So once you're certain of the guru's extraordinary insights, your mind will literally make you blind to all of the conflicting evidence. This is how Ponzi schemes work and don't be fooled, they work
12/ on everyone, because we all have the same basic programing. Again, the farmer would have bet his farm on the fact that the boy was a thief, and he'd have lost it. Don't bet the farm on anything, no matter how certain you are.
13/ The third thing we learn is, always look for a reason you might be wrong. The farmer never considered that he could have lost his purse or that his wife might have taken for shopping. He never even thought to ask. In the market, always question your assumptions and follow
14/ the teachings of Max Planck who was forever trying to prove that his hypothesis was *wrong,* not right. This is a very hard habit to get into because it flies in the face of our ego identification--like the kids from Lake Wobegon, we all want to be above average and
15/ by definition, right. We're not. It also shows the troubles we can get in when we are absolutely certain of something. I'm almost never 100% certain about anything and it helps a great deal.
16/ The forth thing we'll borrow directly from the book: "our minds do not passively receive impressions from the "external world." Rather we actively create our impressions: out of an ocean of possible signals, our brains notice the signals that fit what we expect to see,
17/ and we organize these signals into a model, or reality-tunnel, that marvelously matches our ideas about what "is really" out there."
Or more simply, we see what we expect to see. If your bullish on stock XYZ and a slew of numbers come out on the company, you will *not* see
18/ what you're not expecting to see. Today's political environment makes this point nicely: two people can watch the *exact* same thing and depending upon their expectations, come away seeing two *very* different things, sometimes radically so. The same holds for the market.
19/ Finally, realize that you are slave to your preconceived notions. If you expect bad things, you'll find bad things. The converse is also true. Always ask--What am I missing? Could I be wrong. You'll be amazed how much more clearly you see when you habitually ask this.