It’s no wonder why we are not good at designing things. The design mindset is grounded in what we “know.” We seem to be much better at discovering things. The discovery process is fueled by what we “don’t know,” so we “tinker” and discover.

I note in the “Why Are We Such Suckers For Prediction?” post, if you are an auto mechanic, you most likely know more about fixing cars than you don’t know about fixing cars. Also, errors are easily rectified. In this light, a good mechanic is an expert. If you are a psychologist or an economist, I don’t think so. In fact, it’s practically impossible that your knowledge of the human condition would exceed your lack of knowledge of the human condition. Not to mention that mistakes can be catastrophic in these “big system” type professions. Plumbers don’t kill people, but doctors do. Mistakes when predicting the weather, the economy, or the financial markets can, and do, ruin our lives.

It seems the big things we know the least about are the very things that count the most.  

Here is a great video of Nassim Taleb and Charlie Rose discussing these issues and the random rare events that have huge consequence:

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If we want to become better traders, we need to rely more on ourselves, and less on the conventional wisdom offered by the industry experts. We have to build our own personal approaches. This process requires us to “try different things” for solutions to our problems. Personally, I have discovered many useful and profitable strategies by just testing different concepts and intuitions. I have also discovered a few useful strategies by accident. In other words, while testing one strategy, I discovered an even more significant strategy. This is fairly common. 

Dr. John Harvey Kellogg and his brother Will were searching for strict wholesome foods to feed ill patients, when Will accidentally left some boiled wheat sitting out. When it went stale, they hoped to roll it into long sheets as to not waste it, but it broke down into flakes. So they toasted the flakes, added some sugar and it turned out to be a big hit with the patients.  Kellogg’s corn flakes were discovered. 

The microwave oven was also accidentally discovered by Percy LeBaron Spencer of the Raytheon Company. He noticed that radar waves had melted a candy bar in his pocket. Further experiments showed that microwave heating could raise the internal temperature of many foods far more rapidly than a conventional oven. Now, what would breakfast be like without cornflakes or a microwave? 

The list goes on. Hypertension drugs led to Viagra and angiogenesis drugs led to the treatment of macular degeneration. Even Potato chips, penicillin and vulcanized rubber were discovered by accident.  In fact, a fair amount of what we claim was developed from research, was really accidental. Mostly it’s the result of undirected trial and error, packaged as controlled research. So, we should be out there every day exploring and testing our observations and intuitions, and trying to find application in our trading.

Author Nassim Taleb wrote, “America’s primary export, it appears, is trial-and-error, and the innovative knowledge attained in such a way. Trial-and-error has error in it; and most top-down traditional rational and academic environments do not like the fallibility of “error” and the embarrassment of not quite knowing where they’re going. The U.S. fosters entrepreneurs and creators, not exam-takers, bureaucrats or, worse, deluded economists. So the perceived weakness of the American pupil in conventional studies is where his or her very strength may lie. The American system of trial and error produces doers: Black Swan-hunting, dream-chasing entrepreneurs, with a tolerance for a certain class of risk-taking and for making plenty of small errors on the road to success or knowledge.”

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The quality of information determines the significance in the numbers. Probabilities are wonderful, but they are only as good as the quality of information that forms them. Information, such as the logic behind the method is critical. It is impossible to trust the interpretation of past data where logic is absent.

In his book “Fooled by Randomness” Nassim Nicholas Taleb illustrates this problem by saying:

This is not logical, even though there is a large sample of observations. The statistics should shed light on the logical intuitions of the developer.  In other words, it must make sense.

If a particular intuition is being tested (for example 20 day breakouts) it has a much higher degree of significance than throwing the computer at data and scanning for relationships. I’m sure with enough data we can find the relationship between Federal Reserve tightening and Federal Express deliveries, but it won’t have any significance.

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It is tough to make predictions, especially about the future. - YOGI BERRA

I keep CNBC on all day while I work. Perhaps I think I will miss something, or maybe it’s the background noise that’s appealing. In any event, what I always find amazing is the parade of experts making one prediction after another. I think I would fall out of my chair if I heard one of them say “Well, to tell you the truth Mark, I have no idea”.

What’s most surprising is the arrogance in which these forecasts are made. The forecaster always seems convinced he is right. I think the world is far more complicated than we think, yet we always seem to place way more value in what we know over what we don’t know. If you are an auto mechanic, you most likely know more about fixing cars than you don’t know about fixing cars. Also, errors are easily rectified. In this light, a good mechanic is an expert.

If you are a psychologist or an economist, I don’t think so. In fact, it’s practically impossible that your knowledge of the human condition would exceed your lack of knowledge of the human condition. Not to mention that mistakes can be catastrophic in these “big system” type professions. Plumbers don’t kill people but doctors do. Mistakes when predicting the weather, the economy, or the financial markets can and do ruin our lives. Nothing is as potentially dangerous as a rational prediction in an irrational world. So, are there really experts in these professions or are they just the one-eyed men in the land of the blind? I Guess Yogi Berra, the great baseball player/coach had it nailed when he said “It is tough to make predictions, especially about the future.”

I think we love predictions because if we make predictions, and/or concoct explanations for those events we predicted wrong, then we won’t feel like victims of randomness. We feel more in control. But are we more in control or just intoxicated by some illusion of control?

In his book “The Black Swan” Nassim Taleb says, “We have seen how good we are at narrating backwards, at inventing stories that convince us we understand the past. In spite of the empirical record we continue to project into the future as if we were good at it, using tools and methods that exclude the rare events.” Funny isn’t it, since the big, rare, unpredictable events are precisely what shape the world. Events like the automobile and the World Wars, the internet and the Beatles.

I think it’s ironic that by accepting we have little control over most things, actually gives us greater control over what might happen. By realizing our lack of control we may be able to minimize the more negative events. If we realize anything can happen when trading commodities, then we are more likely to actively manage our exposures to big loss and potential ruin.

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You don’t have to agree with everything, but it certainly pays to be aware of the impact of the highly improbable. He defines a highly improbable event (a black swan) as “one that is unpredictable; carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable.”

Part of the reason we do this is that as humans we are built more to learn specifics and focus less on generalities. We tend to rely much heavier on what we know as opposed to what we don’t know. I find it very interesting because instinctively I realize that what I don’t know about a subject, a company, or a commodity has to exceed what I do know. However, we are constantly fooled into thinking what we do know is significant. Good food for thought and remember……Expect the unexpected.

Below is a video of Nassim on CNBC’s Squawk Box.

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