The Slate advice columnist, Dear Prudence, received the following sad, poignant, and probably futile letter.
“I keep making terrible decisions and can’t seem to stop.
“Last year I left my home, my family, my friends, a 20-year secure (if uninspired) career, to move 2,000 miles away to be with my first love. I’m 50 and I was his first love as well. He’s married and his wife invited me to their home. We decided to share him, although his wife and I were not interested in one another like that.
“My job here fell through. My dog died. The romance flopped spectacularly. I still love him desperately. And when he told me that it was over and that he didn’t love me and never had, I begged him to reconsider, only to have his wife come in and start screaming at me to keep my f***ing hands off her f***ing husband.
“I snapped. I tried to kill myself. I ended up in a coma and then went to the psych ward. I have been out for only a week. I’m back at work. I’m freshly diagnosed as Bipolar I. I’m on new meds I don’t think are helping. Of course, I had to move out and I’m living a very lonely life. I do not feel stable and I cry for hours every night. The loneliness is killing me. I have psychiatric follow-up and intend to do what I can to survive and thrive.
“My former boyfriend is now making noises about wanting to be ‘friends with benefits’ with me once I am ‘well again,’ which sounds more like he wants a self-supporting mistress that he can come and have sex with and then leave at will. I still love him but I realize this is a gross affront to my worth as a human being. I just don’t trust myself to say ‘no.’ Counselling may help but I still don’t trust myself to make good, healthy decisions. Everything I do blows up in my face.
“Any advice?”
We humans are shockingly prone to bad ideas, ideas that escalate to terrible decisions, and then metastasize into actions that undermine, damage, or even ruin our lives and futures. We’d all like to think that we’re a lot better off than the letter-writer above, and we probably are (if not so self-aware), but vanishingly few of us have a consistently good track record of decision-making and none of us is as good as we think we are.
Even when we’re on the straight and narrow path to success, we are prone to wander. None of us is unbroken, unscathed, or unhurt.
The idea that we act in our own rational self-interest with any degree of consistency is, quite obviously, ludicrous, and is falsified every single day by our choices and our lives. Worst of all, we readily recognize such self-destructive behavior in others – such as the above correspondent – but consistently and tragically lack the ability to see it in ourselves.
We can’t seem to help it.
The ever-practical Abraham Lincoln asked, “It is not ‘can any of us imagine better?’ but, ‘can we all do better?’”
I think we can. But it isn’t easy. That is the subject of this week’s TBL.
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Only Human
All day, every day, we are observers of the world around us. We interpret what we perceive and make decisions based upon those interpretations. It is axiomatic that the more accurate our observations and the better our interpretations of them – the closer they comport with objective reality – the better our decisions can be.
On many days, all too much of the time, we’re delusional, lazy, short-sighted, partisan, arrogant, easily distracted confabulators. Whether we’re looking in the mirror or into our souls, we usually see only the best version of ourselves. In effect, we hold up a picture of who we like to think we are or can be, point to it, and pretend it’s what we look like.
However, like Bruce Wayne or the Dread Pirate Robert, we all have at least two distinct identities.
On our best days, wearing the right sort of spectacles, squinting and tilting our heads just so, we can be observant, efficient, loyal, focused, assertive truth-tellers.
Getting and staying there – putting on “the right sort of spectacles” – is a great problem and an enormous challenge. If we are going to do better and be better we need to figure out how to do that and do it more often. There are any number of potential aids,1 large and small, to be applied to our problematic decision-making. But our doing better and being better begins with three fundamental principles.
Purposefulness
Improving our decision-making starts with paying better attention.
The violinist Joshua Bell, dressed in jeans, a long-sleeved T-shirt, and a Washington Nationals baseball cap, busked for change outside a Washington, D.C. Metro station during rush hour in 2007, playing some of the masterworks of the classical repertoire on a 1713 Stradivarius for which he is reported to have paid $3.5 million.
During the three-quarters of an hour that Bell played on that January day, one solitary commuter out of 1,097 recognized him, one of the world’s great violinists.
One.
Only seven people slowed down to take in the performance, at least for a minute. Twenty-seven gave money, most of them on the run – totaling $32.17. After each of the six pieces Bell played ended, there was no applause or recognition of any kind. Hundreds of people hurried by, oblivious to the proximate genius.
Almost nobody saw or really heard what was right there and free of charge. They missed greatness by failing to expect greatness or even to consider that greatness might be lurking unawares. Commuters raced past Bell and ignored one of the musical virtuosos of our generation because stopping and paying attention wasn’t part of their expectations and wasn’t in their plans. He may as well not have been there.
Every single child who walked past Bell tried to stop and listen and every single time a parent scurried the child away. Kids have fewer and lesser expectations than we do. Kids have fewer pre-conceived notions than we do. Often times, quite remarkably, kids pay much better attention than we do. As those children in the Metro station demonstrate, it takes no special talent or skill to pay attention.
Much truth, not to mention beauty, is all around us, hiding in plain sight. We miss it because it’s outside our comfort zone. Or it doesn’t comport to the views we already hold. Or it seems to contradict our ideologies. Or we’re not curious. Or it doesn’t come packaged the way we expect or from a source we expect. Or maybe it’s hard to see. Or perhaps it simply doesn’t fit with our view of the world (or the economic cycle, or the markets, or politics, or, or, or). Or maybe we simply aren’t paying attention.
In nearly every context and situation, we routinely hear, see, and perceive exactly what we expect, missing Joshua Bell in the process. Most of us will medal in the mental gymnastics Olympics before we’ll decide we were wrong about something significant.
We readily accept experience as authority even when the alleged experience is fake. And that which is authentic is increasingly hard to determine because the demarcation between what’s real and what’s counterfeit can be so hard to discern, especially in our information-soaked world.
As ever, information is cheap while meaning is expensive. If we’re going to get better at mitigating our biases, it will start with paying purposeful attention.
Critical Thinking
Once we have observed what is around us, we have to analyze that information in order to do something with it, because facts without interpretation are useless. Critical thinking, the means by which we do that, requires the application of logical principles, rigorous standards of evidence, and careful reasoning to our analysis of issues, questions, claims, beliefs, and conclusions. The ideal critical thinker is one who is inquisitive in nature, open-minded, flexible, fair-minded, has a desire to be well-informed, understands diverse viewpoints, and is willing both to suspend judgment and to consider other perspectives.
That sounds a lot like Sherlock Holmes.
Unlike other superheroes, Sherlock’s superpower is grounded in reality. As Holmes says, his work centers on “those faculties of deduction and of logical synthesis which I have made my special province.” It is a skill – usually inductive (and not, as commonly assumed, and as Holmes incorrectly asserts, primarily deductive) reasoning – that, while hardly elementary, is something to which we can all aspire.
One gets to Carnegie Hall via practice, practice, practice.
Consistent with good critical thinking, the “Holmes System” of mindful decision-making requires careful observation and then analysis of what is observed that is slow, methodical, logical, and comprehensive, much like Daniel Kahneman’s “thinking slow.” Sherlock is an exemplar of both mindful thinking and of expertly trained insight. He sits in a comfortable leather chair for long stretches to consider the alternatives in multiple different ways, arranging and rearranging the evidence in his mind like puzzle pieces. Like Holmes, “We must learn to look for evidence that both confirms and disconfirms” our existing views.
Sherlock’s mind is fully awake and engaged, with great stamina. I discovered that Saturday chores could be remarkably productive in other ways if I turned off the radio, made a conscious effort at careful thought, and carried a pad and pencil for when ideas came. On the other hand, the “Watson System” is quick and intuitive, not unlike Kahneman’s “thinking fast,” whereby the good doctor, Sherlock’s necessary foil, suppresses his curiosity and lets his preconceived notions and first impressions control his thinking. As Holmes accuses Watson, “You see, but you do not observe.”
If we are asked about pink elephants, we can’t help but picture them as if they really existed, and “disbelieving is hard work,” as shown by Harvard’s Daniel Gilbert. “Holmes’s trick is to treat every thought, every experience and every perception the way he would a pink elephant,”Maria Konnikova explains.
But more than great observation and critical thinking skills are required.
One of literature’s iconic first meetings takes place in A Study in Scarlet, wherein Holmes and his soon-to-be partner, Watson, meet cute (in an intellectual way) at the chemical laboratory of a hospital where Holmes is conducting experiments. They are brought together by a mutual acquaintance because they both are looking for affordable accommodation, which turns out to be the famous address on Baker Street. Holmes proceeds to astonish Watson with his observational and critical thinking skills by ascertaining (“sherlocking”) much about the good doctor’s life from seemingly scant evidence.2
That famous scene in the BBC’s modern retelling of the Holmes stories, starring Benedict Cumberbatch as Sherlock and Martin Freeman as his stalwart sidekick, wherein this first Holmes story is re-imagined as A Study in Pink, is shown below.
As in the Victorian original, Holmes determined that Watson had been in Afghanistan prior to their first meeting in part because he was practiced and accomplished in the art of observation and critical thinking, but also because he had a broad and deep knowledge of the British military, geography, how injuries heal, and current events. How Doyle described that process follows.
“I knew you came from Afghanistan. From long habit the train of thoughts ran so swiftly through my mind, that I arrived at the conclusion without being conscious of intermediate steps. There were such steps, however. The train of reasoning ran, ‘Here is a gentleman of a medical type, but with the air of a military man. Clearly an army doctor, then. He has just come from the tropics, for his face is dark, and that is not the natural tint of his skin, for his wrists are fair. He has undergone hardship and sickness, as his haggard face says clearly. His left arm has been injured. He holds it in a stiff and unnatural manner. Where in the tropics could an English army doctor have seen much hardship and got his arm wounded? Clearly in Afghanistan.’ The whole train of thought did not occupy a second. I then remarked that you came from Afghanistan, and you were astonished.”
Subject matter expertise and critical thinking skill are not in any way the same thing, of course. However, you can’t engage in effective critical thinking without adequate domain knowledge.
As Kahneman himself acknowledges, making consistently good choices based upon good reasoning is really hard. Training ourselves to do so more intuitively is even harder. That’s partly because we’re lazy and it takes lots of practice and partly because it isn’t just a skill to be learned. Productive critical thinking requires adequate domain knowledge as well as lots of practice. Most of us come up short on both.
Science
Galileo’s life and work became a historic watershed in the history of science. Most fundamentally, Galileo’s greatness was a function of his unwillingness to take anyone’s word for things. He checked others’ work, made it his work, and then checked his own work. As such, he was the key to experimental science, an expression that is now redundant, thanks in no small measure to him. When Galileo read Aristotle and his assertion that heavier objects fall faster than lighter objects, he checked it out himself to find it wasn’t so. Which, astonishingly, neither Aristotle nor anyone else to that point had apparently bothered to try.
Science is specifically designed to mitigate bias. Indeed, the scientific method is the only system with a decent track record for doing so. Thus, the scientific method can and should be applied to traditional science as well as to all types of inquiry and study, at least conceptually. It is a systematized regimen of critical thinking in a scientific context. The great scientist Richard Feynman even applied this sort of experimentation to hitting on women, albeit in a creepy and offensive manner.
This approach to figuring the world out as a matter of objective fact – the essence of the scientific method – is demonstrated in the 1993 film, And the Band Played On, based upon fact and upon the book of the same name (the movie is available here, at least for now).
In a crucial scene early on, researchers at the Centers for Disease Control meet in 1981 to discuss the statistics of a deadly virus – that we later learn to be HIV – sweeping through the gay community. To that point, nobody had been able to come up with a decent explanation for what they had been observing. So, the boss walks into the meeting and asks, “All right, what do we think? What do we know? What can we prove?”
That concept ends up being a running theme in the movie and gets to the heart of the scientific endeavor. What do we think? What do we know? What can we prove?
These categories can be a bit loose, of course, with distinctions based upon the nature and quality of the evidence. Moreover, “proof” in science is inductive and doesn’t have the deductive certainty that it can in math. We could be wrong, at least in theory, even when we’re really, really sure and think we can demonstrate something factually.
There are relatively few things in the investment world I am confident I can prove with a high degree of certainty, for example. Among them are the difficulty in beating the market, that costs matter a lot, that we are often slaves to our cognitive and behavioral biases, and that humans are dreadfully poor at predicting the future.
In this context, then, “know” is where we’re really sure but don’t have all the data we’d like to support it. As in the film, “I can’t prove that the sun isn’t going to turn into a bran muffin next Tuesday, but after 20 years of doing this I know what I know.”
The “know” category in investing includes the existence and persistence of the value premium, momentum and low beta outperformance persistence, the efficient market hypothesis being nonsense (even though, as noted, it is exceedingly difficult to beat the market), and the reality that good advice matters a lot.
Stuff in the “think” category includes things I believe to be true but am not entirely sure of. These include the idea that mixing passive and active strategies makes great sense, that “old always” (mean reversion) beats “new normal,” and that the universe of financial advisors is poorly trained, poorly incentivized, and ill-equipped.
Finally, the key to science, and good thinking generally, is the idea that every concept, no matter how well established, is subject to revision or even rejection based upon new or better evidence. That’s how good science works. We’re all wrong and wrong a lot even if and as our cognitive shortcomings prevent us from seeing current examples very often.
If we’re going to be any good consistently, we need (counterintuitively) to commit to the idea that we’re going to be wrong a lot and intentionally look for ways to be shown where and how. As my late father used to remind me, it’s what you learn after you think you know everything that really counts.
Unfortunately, life experience conspires to make it more difficult to adjust or amend our positions over time. The older we get, the more authority we acquire, the more success we achieve, the more prominent we become, the more admired we are, the harder it is for us to see our mistakes and act accordingly. And since greater conviction leads to greater perceived confidence, certainty, and thus credibility and success, it’s easy to continue to fool ourselves, especially when things are going well.
There’s a famous expression to the effect that it’s hard to reason someone out of a position that wasn’t reasoned into, and there’s truth in it. It’s hard enough to influence or help alter a person’s beliefs – about investing, the news, or even the Dodgers’ relative evilness – much less someone’s life commitments. But if we’re to have a chance to make better, more reality-based decisions (about investing and everything else), we’re going to have to try and to begin with ourselves.
Given what we know (even if we can’t quite prove it), we should start with a simple commitment, but not a commitment to any cause. Instead, let’s make a commitment to truth and to continually checking our work. We should all want a commitment to truth – wherever it leads – to be our defining attribute. We should always aspire to do some science, even when it’s not about science.
As the great rock critic and truth-teller Lester Bangs (Philip Seymour Hoffman) told William Miller (Patrick Fugit) in Almost Famous, you make your reputation by being honest and unmerciful.
Just like in science.
Getting Started
Some powerful ideas can be brought to bear in support of good critical and scientific thinking, including the following.
Analyze your situation carefully and fully (observation – paying mindful attention).
Do the necessary research (assure sufficient domain knowledge to be able to apply critical thinking).
Practice skepticism, beginning with yourself (and be sure you have plenty of inputs that don’t share your ideas, views, beliefs, and commitments).
Challenge all assumptions.
Withhold judgment as long as possible.
Revise your conclusions based upon new evidence. For Christians, Hell is having your own way and being stuck with it. That concept works for science too. Ideally, it is like living in a world with constant auto-correct. It’s sometimes (and sometimes hilariously or tragically) wrong, but it’s usually an efficient improvement.
Remember that errors and mistakes are evidence too.
Keep looking for new evidence.
Keep testing your ideas and hypotheses.
Check with relevant subject matter experts.
Emphasize data over belief and process over outcomes.
Consider that with which you disagree as generously as possible using the philosophical “principle of charity.”
Keep looking for what you (and others) might have missed.
In other words, apply the scientific method as much as possible.
Behavioral economics is endlessly fascinating, but largely devoid of ways to mitigate the problems so engagingly put on display. As Kahneman said, when asked about his hope for human improvement in light of our biases and cognitive illusions: “I’m not an optimist in general and I’m certainly not an optimist about those questions….You don’t get there.”
Yet science gets there every single day, if inconsistently or imperfectly. Every. Single. Day.
Humanity has ascended from huts in Sub-Saharan Africa to high-rises around Central Park, from fighting for basic freedoms to fundraising for philanthropy, from struggling for survival to searching for the secrets of the universe.
Humans have split atoms and spliced genes. Humans have extended lifespans and expanded economies. Humans have provided prosperity and limited poverty. We contemplate the quantum, the cosmos, and the commonplace.
That’s amazing, and very good news. It’s remarkably promising and hopeful news too.
We are far from perfect and there is much still to be done, of course, but there is profound hope for the future because so much remarkable good has already been done. Critical thinking and science are crucial to that having happened and imperative for continuing the progress.
What I am advocating, fundamentally, is the consistent use of critical thinking and the scientific method, broadly construed. They provide the best mechanisms we have for ascertaining and applying what’s true.
In essence, that means: Be skeptical. Ask questions. Follow the evidence. Test your conclusions. Rinse. Repeat.
The results can be astonishing.
F. Scott Fitzgerald glibly (yet famously) proclaimed that “the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” He might be righter than he knew, righter than he could have known. We are a shoddy species, yet we still can accomplish much, supported by what Lincoln called “the better angels of our nature.” Fundamentally, we aren’t nearly as stupid and ridiculous as often portrayed within behavioral finance. We are no homo economicus, but we aren’t idiots, either.
We are human. Frustratingly but powerfully human. For good and for ill. I choose to find hope in that. Your mileage may vary.
Totally Worth It
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Benediction
We live on “a hurtling planet,” the poet Rod Jellema informed us, “swung from a thread of light and saved by nothing but grace.” To those of us prone to wander, to those who are broken, to those who flee and fight in fear – which is every last lost one of us – there is a faith that offers grace and hope. And may love have the last word. Now and forever. Amen.
As always, thanks for reading.
Issue 178 (June 14, 2024)
The many techniques offering potential improvements include pre-mortems, the outside view, checklists, skin in the game, eliminating “noise,” making fewer decisions, slowing down, simplifying, and inverting our thinking.
Of course Holmes is fictional and of course the trick isn’t likely to work in real life because so many other possibilities exist, but the approach is sound, even if it works out a lot better on television than in real life.
"Fundamentally, we aren’t nearly as stupid and ridiculous as often portrayed within behavioral finance."
Yes, such a seemingly benign but important belief. This is what bugs me the most about mechanized behavioral finance speak. People internalize the view of helplessness so much so that it becomes a self-fulfilling prophecy. To better yourself, you have to at least start from the premise and genuine belief that you have the potential to better yourself!
This is the best blog post that I've read for a while. I'm sharing with my friends.