Blog - Investing Notes

September 20, 2005 – Fooled by Consciousness

As noted in our blog entry of 7/17/05, a couple of readers have strongly recommended Fooled by Randomness by Nassim Taleb as a valuable resource for investors/traders. We have begun the book (the 2004 second edition), and our more-than-passing familiarity with modern physics makes it a generally comfortable intellectual environment. Here is one initial reaction about being (profoundly) "fooled"...

A long time ago for a college psychology course we read The Machinery of the Brain by Dean Wooldridge. One statement from this book stuck:

"[Consciousness is] a sort of display device of unspecified calibration and distortion-producing characteristics, which is connected in an unknown way into the complicated circuit we are trying to understand, but which nevertheless provides clues that may help us find solutions to some of the mysteries with which we must deal."

Research on the psychology and biology of decision-making has over the years, we think, sustained this view of consciousness. As investors and traders, we must therefore deal with:

• The complexities of financial markets;
• The fundamental uncertainties (randomness) in the outcomes of valuation-moving events;
• Brains that may not be well-adapted to rational optimization of returns; and,
• An inability to grasp the degree to which we are behaving irrationally.

We cannot completely trust what we tell ourselves, let alone what others tell us.

How do we mitigate our profound foolishness? Awareness of the condition is the first step. We further suggest consciously checking for common behavioral biases (see our blog entries of 9/2/05, 8/10/05, 7/8/05, 6/21/05, 4/16/05, 4/12/05 and 3/28/05, for example) when making investment/trading decisions.

We will augment this entry with additional reactions as we make our way through Fooled by Randomness.