The Better Letter: Say What?!

Part Three of my making behavioral finance practical series: The Method

I love Top Gun, the quintessential San Diego movie, and am excited to see the new sequel this weekend. But it offers the antithesis of critical thinking and scientific reasoning. “You don’t have time to think up there,” Maverick explains, the faintest glimpse of a furrow working its way across Tom Cruise’s perfectly airbrushed brow (quoting a guy with the perfect film critic name, Adam Nayman).

“If you think, you’re dead.”

Critical thinking – science, broadly construed – is the best approach we have for determining what is real. Thinking is an absolute requirement. Most of the time, more and better scientific thinking will help all of us live longer and better. It is the subject of this week’s TBL, the third installment of my series on making behavioral finance practical.

Part One: The Experiment

Part Two: The Misinformation Milieu

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Thanks for reading.

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The Method

One of literature’s iconic first meetings takes place in Sir Arthur Conan Doyle’s A Study in Scarlet, wherein Sherlock Holmes and his soon-to-be partner, Dr. John Watson, meet cute at the chemical laboratory of a hospital where Holmes was conducting experiments. They are brought together by a mutual acquaintance because both are looking for an affordable accommodation, which turns out to be the famous apartment at 221B Baker Street.

Holmes proceeds to astonish Watson with his observational and critical thinking skills by ascertaining much about the good doctor’s life and experience from seemingly scant evidence. This meeting is the genesis of the friendship that becomes perhaps the quintessential buddy-comedy relationship in literature. Here is Doyle’s original description of Holmes “sherlocking” Watson’s backstory, which climaxes that first meeting.

“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.”

Holmes may as well be the patron saint of observation and induction, which is the essence of critical thinking – science, broadly construed. Watson becomes his necessary foil.

Critical thinking, applied correctly, seems like magic. Yet, Sherlock’s extraordinary intellect as well as his unique powers of thought, observation, and logical deduction are fully rooted in reality. No superhuman strength. No x-ray vision. No giant Norwegian hammer.

Holmes sees everything and misses nothing. Everything he needs is readily available and observable. The key is knowing when, where, and how closely to look.

Such mastery of reality takes good analysis – the stuff of critical thinking – but also demands comprehensive factual knowledge and subject matter understanding. As I often say, information is cheap, meaning is expensive.

Another look at the first meeting of Holmes and Watson offers insight here. Holmes determined that Watson had been in Afghanistan prior to their first meeting in part because he was very practiced and accomplished in the arts of observation and critical thinking, but also because he had a broad and deep knowledge of the British military, geography, how injuries heal, and the day’s current events. Without both that practiced skill and that knowledge, Holmes would have remained entirely in the dark about Watson’s personal path to their meeting.

Science, the systematic application of critical thinking, provides a clear, practical model of how to proceed from ignorance to understanding. It is the best system we have for managing and overcoming our foibles, errors, and biases.

Aristotle posited that heavy objects fall faster than lighter objects and that males and females have different numbers of teeth, based upon some careful – though flawed – reasoning. Yet it never seems to have occurred to him that he ought to check before presuming he was right. Science, via Galileo, corrected that error with respect to gravity. Looking in mouths and counting corrected the mathematical error.

The scientific method is the “procedure that has characterized natural science since the 17th century, consisting in systematic observation, measurement and experiment, and the formulation, testing, and modification of hypotheses.” Science is about making observations and then asking pertinent questions about those observations. What it means is that we observe and investigate the world and build our knowledge base on account of what we learn and discover, but we check our work at every point and keep checking our work. It is inherently experimental. To be scientific, then, our inquiries and conclusions need to be based upon substantive evidence. We won’t just “know.”

With scientific reasoning, we move from idea to hypothesis to theory (which, unlike much manifest ignorance on the subject, only relates to things that are exceedingly well established), with (inductive) “proof” meaning correlation, consistency, and noncontradiction. Such conclusions, no matter how powerful, are always subject to modification or even outright rejection based upon further evidence gathering.

That’s why science isn’t as powerful as we’d like it to be and as we often assume.

Unlike math, the universe is an open system, subject only to inductive inference. I cannot be sure that I have seen and analyzed every possible outcome. If I have seen a million swans over my lifetime and all of them were white, I might conclude that all swans are white. But I would be wrong, as black swans reside in Australia.

Accordingly, scientific conclusions are inferred, not demonstrated. Inductive reasoning, which is an extrapolation from the information we observe to arrive at a conclusion about something that we have not observed, cannot offer definitive results. However, it is how science must be done in a universe that is open.

The distinction between deductive and inductive reasoning is not commonly understood. Much of what we think of as brilliant deductive skill…

…is actually brilliant inductive skill, which works out a lot better on television than in real life. Because induction is necessarily the way science works and advances, uncertainty is inevitable, no matter how smart any of us are or how omnipotent Sherlock Holmes may appear.

“Once you have ruled out the impossible, whatever remains, however improbable, must be true,” says Sherlock.

Significantly, Holmes frequently fails to “exhaust the hypothesis space.” Holmes is far too certain of his ability to marshal all the possibilities. The number of possible hypotheses will almost surely exceed the imagination of one inherently limited thinker, even one as gifted as Sherlock Holmes. Even Aristotle. The “highly improbable” is indeed possible, but less likely than an unconsidered hypothesis. Each of us is limited by a lack of knowledge, a lack of imagination, and bias.

The “sherlocking” example in the clip immediately above (following the money quote), whereby the detective creates an entire explanatory narrative from a few careful observations – offered by Holmes to show that “There is nothing wrong with me, do you understand?!” – demonstrates the point.

Holmes posits a plausible narrative, to be sure, but there are others. Perhaps the woman is a mark and the man, an out-of-work fisherman who has turned to larceny, wears the Christmas “jumper” to inspire trust because she loves the season. Perhaps the man is trying to seduce the older woman to marry her for her money. Perhaps the man has lost a bet to the woman and is forced to pay for a dinner he cannot really afford while wearing an ugly Christmas sweater to make good on it. Perhaps the man is trying to lose some weight. I’m sure you can come up with others.

Similarly, it isn’t hard to imagine multiple scenarios in which Sherlock’s inductive conclusions about Dr. Watson and Afghanistan at their first meeting are badly wrong.

Holmes’ plausible scenarios aren’t ordained. The implausible happens all the time.

Most notably, it never seems to have occurred to Holmes that he ought to check before presuming he was right. That’s hardly good scientific practice.

Because logic and critical thinking are undertaken by humans, their use is often flawed and their conclusions suspect.

Science runs the same risk.

“Forensic science, which drives the plots of movies and television shows, is accorded great respect by the public,” Barbara Bradley Hagerty wrote. “In the proper hands, it can provide persuasive insight. But in the wrong hands, it can trap innocent people in a vise of seeming inerrancy.” 

Accordingly, false or (often intentionally) misleading forensic evidence – essentially fake science – is a contributing factor in huge numbers of wrongful convictions nationally, according to the National Registry of Exonerations.

Similarly, these inherent difficulties are the best explanation, generally speaking, for the replication crisis in science. Meanwhile, incidents of scientific fraud and misconduct have exploded, too.

And the beat goes on. The scientific world is less certain and far messier than we’d like to think.

Note too that Sir Arthur Conan Doyle, the creator of Sherlock Holmes and the author of many great paeans to rationality, believed in fairies and thought his wife could talk to spirits.

As UCLA paleobiologist William Schopf asked within a commentary on the origins of life, “What do we know? What are the unsolved problems? What have we failed to consider?”

The ultimate key to finding scientific truth (always a small-t) is whether the conclusion actually works. Stating confidence in expected outcomes is easy. Getting a good result is much tougher to accomplish. Even so, when a scientific concept works – as when someone hears Samuel F.B. Morse tapping out “What hath God wrought?” (Numbers 23:23) in a new code on the other end of a telegraph line – it is only provisionally true, always subject to new evidence or understanding, to something that works better.

Let’s suppose you have a coin you suspect is loaded. You toss it five times and it comes up heads five times. We know deductively that five heads in a row from tossing a fair coin should happen about three percent of the time, less than the five percent threshold usually used for ascertaining statistical significance. However, the inductive inference you were looking to make (the coin is loaded!) is hardly established. Probability and frequency are not the same things. Five heads in a row while tossing a fair coin doesn’t happen a lot, but it happens. Therefore, more testing is needed even to be reasonably sure of your (inductive) conclusion.

As Dr. Johnson remarked to Mrs. Thrale: “It is more from carelessness about truth than from intentional lying, that there is so much falsehood in the world.” It’s the point I made the first time I was quoted in The Wall Street Journal.

We want deductive (demonstrative, definitive) proof. Because we love certainty, it often feels (wrongly) like we have deductive proof. We are desperate for sure-fire, black-and-white, lead pipe locks. Such sure things are incredibly rare in the real world, despite what salespeople and politicians tell us. In the real world, we usually have to settle for inductive (tentative) conclusions, as inductive logic is anything but guaranteed.

Accordingly, the great value of evidence is not so much that it points toward the correct conclusion (even though it often does), but that it allows us the ability to show that some things are conclusively wrong. Never seeing a black swan among a million swans seen does not prove that all swans are white. However, seeing a single black swan conclusively demonstrates that all swans are not white.

The simple fact of the matter is that the negative proof construct does not resonate with us – we intuitively dislike disconfirming evidence. We tend to neglect the limits of induction or ignore potential disconfirmation and jump to overstated conclusions, especially when they are consistent with what we already think.

Few academic papers get published establishing that something doesn’t work. Instead, we tend to spend the bulk of our time looking for (and data-mining) an approach that seems to work or even for evidence we can use to support our preconceived notions. We should be spending much more of our time focused upon a search for disconfirming evidence for what we think.

As Charlie Munger famously said, “If you can get good at destroying your own wrong ideas, that is a great gift.” 

Science is designed to be questioned, challenged, tested, scrutinized, and debated. That is precisely the point. If doing so is not permissible and basic lines of inquiry are censored or prohibited, then it's not science, but secular dogma.

Still, the scientific method, broadly construed, can and should be applied not only to traditional science, but also, to the fullest extent possible, to any sort of inquiry into or study about the nature of reality. It remains relentlessly focused on what works, what doesn’t, and why.

Despite its problems and limitations, it is the best method we have for wading through the expanse of information that surrounds us and finding, if only provisionally, what’s real and (small-t) true.

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Totally Worth It

There is a new documentary out about Fanny (1970-1974, when I was in high school), the first all-female rock band to sign with a major label. They were good.

Feel free to contact me via rpseawright [at] gmail [dot] com or on Twitter (@rpseawright) and let me know what you like, what you don’t like, what you’d like to see changed, and what you’d add. Praise, condemnation, and feedback are always welcome.

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This is the best thing I read this week. The funniest. The saddest. The sweetest. The scariest. The stupidest. The most dominant. The best thread; another good one. The best picture. The best idea. Oof. How to become a bootlegger. Bob Cousy with the clapback. Great teaching. Unspeakable tragedy. Here is something we can do. Point: “everyone has their own accurate view of the way things are;” counterpoint. Horrific. The baby formula crisis. Sharkcano. Selling out Little League. Ick. Ickier. Ickiest. Goodbye.

Please send me your nominees for this space to rpseawright [at] gmail [dot] com or via Twitter (@rpseawright).

The TBL Spotify playlist now includes 225 songs and about 16 hours of great music. I urge you to listen in, sing along, and turn the volume up.

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Benediction

This week’s benediction is “Turn! Turn! Turn!” by Walk Off the Earth, written by Pete Seeger, lyrics adapted from Ecclesiastes, and most famously recorded by The Byrds in 1965.  

Amen.

Thanks for reading.

Issue 115 (May 27, 2022)