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Magic calculator for stocks8/11/2023 So, while the magician may still occasionally fool our interpreter, we can definitely try to train our interpreter to not make magic out of the stock market. It helps us better refine our own investing process and not fall for hindsight bias. Process Documentation - Knowing what data we are largely consuming, what our thoughts were after consuming that data and how our thoughts have evolved over time is almost a superpower in itself.After all, “I don’t know” is not something the interpreter is designed to say. So when we attempt to rationalise every move in the market, our interpreter is bound to occasionally confuse randomness with skill and come to faulty conclusions. Randomness - As Nassim Taleb has often touched upon in the Incerto series, investing is a mixture of skill and randomness.Also, having models in our head to explain certain aspects of reality better is bound to come in handy here. Our interpreter will automatically be able to filter data better if we are already an expert in the field. As Warren Buffett has explained, playing a sport in which we are already good at is bound to give us an advantage. Circle of Competence - As we consume more data, it becomes crucial to be able to distinguish between experts and pseudo-experts. The struggle that we as a generation are going to face is to be able to separate the right signals from an ocean of noise. So if we are consuming a lot of garbage, it’s only natural that our interpreter may throw back the same. Garbage in Garbage Out - Our interpreter can only do as well as the data we give it.Simply knowing all this, we couldn’t help but think of four crucial learnings to improve our investing process: Remember that the interpreter’s job is to weave a possible story to explain an outcome, and so all the data you just gave it is being used to weave a narrative. You scroll through Twitter and come across a few contrarians among the largely negative outlook.įlooded with all this data from multiple sources, your own interpreter is now at work. You come across a technical analyst who is highlighting multiple charts showing a negative outlook for the company. You check the latest sell-side coverage and notice a downgrade in the company’s outlook due to business uncertainty. You switch on the television and you have a perpetual bear on the news channel explaining how global unrest is impacting the price of the stock. You are now asking the same question that you do after seeing a cool magic trick: “how or why did this happen?” Instead of the lies of a magician, you are spammed with myriad explanations from various sources rationalising this drop in price. This is a widespread problem, especially in the investing world.įor instance, imagine that the price of a popular stock has suddenly dropped. While we don’t drip bat blood into our eyes anymore, we still build stories and find illusionary relationships between two things, without testing them. This is just one example of the interpreter at work. The logic was that as bats can see during the night, they have sharp eyes and their blood had magical powers that would be transferred to humans. As this was a common problem for the Egyptians, they had to come up with a solution and one such solution was to drip bat blood into one’s eyes. So it can often come up with nonsensical explanations.įor instance, in the olden days, the area along the Nile was known to be the epicentre of a lot of eye infections. Unfortunately, the interpreter’s job is trying to find any explanation of what it saw rather than fact-check. Gazzaniga calls this region the “interpreter”.
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