Facts are important. They are the fundamental truth that allows us to make decisions. They allow us to determine what is right and what is wrong. They help us decipher critical information so we can sift the lies and stories from the actual statistical details, and because of this, they’re very hard to refute. In fact, they’re important to almost everything we do, and never more so than in investing.
Having written the last blog post, ‘Investment Stories vs. Facts’ I happened upon a fabulous interview of Oaktree Capital’s, Howard Marks by Tim Ferris. In the interview, Tim Ferris asked Howard Marks if there were any books he’d recommend. Here’s what he had to say..
“The book I’m working on now is called Factfulness, and basically, it unmasks a lot of misperceptions that people have about the state of the world, and they hold these perceptions generally qualitatively, not based on data, and the author tries to substitute facts for these perceptions. He starts with a list of 13 questions describing the state of the world, and fascinatingly, he gives you the answer to one, and you have to think about the answer to the other 12. The average score on the 12 is two, and he points out that if you flip the coin, you’d get six right. So the average American gets two of the 12 questions right, so not only are they systematically wrong, but they’re wrong in the same direction, which is they always pick the more pessimistic answer when the more optimistic one is true, and so he responds to our bias and tries to overcome the ignorance and the bias by using facts and some great, very communicative graphics. So I would recommend Factfulness, and I love the idea of unmasking biases.”
Surprisingly enough, I already owned the book, and I distinctly remember Microsoft’s Bill Gates praising it. When Bill Gates said this book, “.. is one of the most important books I’ve ever read, an indispensable guide to thinking clearly about the world”, it got my attention.
As Howard Marks suggests, the book highlights the biases that most people carry. And not just Joe Averages either, but groups of Professionals, Nobel Prize laureates and medical researchers. It’s striking to think that people can hold firm to such strong, yet erroneous views.
The books author, the late Hans Rosling, details how the world is getting better, why we don’t notice it and he provides us with some tools for better thinking. There are striking similarities between the approaches to improve one’s thinking and seeing the world as it is, with those commonly espoused by the Investment Masters. The book could easily have been written with an investor in mind, for all great investors are seekers of truth. As Warren Buffett has observed:
“The most important thing in investments is not having a high IQ, thank God. I mean, the important thing is realism and discipline. And you don’t need to be extraordinarily bright to do well in investments, if you are realistic and disciplined.”
And this book will help you with realism …
“This is a book about the world and how it really is. It is also a book about you, and why you (and almost everyone I have ever met) do not see the world as it really is.” Hans Rosling
It’s an easy read with lots of insightful examples. I’ve included some of my favourite quotes below:
“The human brain is the product of millions of years of evolution, we are hard-wired with instincts that helped our ancestors to survive in small groups of hunters and gatherers. Our brains often jump to swift conclusions without much thinking, which used to help us avoid immediate dangers. We are interested in gossip and dramatic stories, which used to be the only source of news and useful information.”
“We need to learn to control our drama intake. Uncontrolled, our appetite for the dramatic goes too far, prevents us from seeing the world as it is, and leads us terribly astray.”
“I want people, when they have been wrong about the world, to feel not embarrassment, but that childlike sense of wonder, and curiosity that I remember from the circus, and that I still get every time I discover I have been wrong; ‘Wow, how is that even possible?’.”
“If you want to convince someone they are suffering from a misconception, it’s very useful to be able to test their opinion against the data.”
“Human beings have a strong dramatic instinct toward binary thinking, a basic urge to divide things into two distinct groups, with nothing but an empty gap in between. We love to dichotomize. Good versus bad. Heroes versus Villains. My country versus the rest.”
“Averages mislead by hiding a spread in a single number.”
“We almost always get a more accurate picture by digging a little deeper and looking not just at averages but at the spread; not just the group all bundled together, but the individuals.”
“The stories of opposites are engaging and provocative and tempting - and very effective for triggering our gap instinct - but they rarely help understanding.”
“What do you need to hunt, capture, and replace misconceptions? Data. You have to show the data and describe the reality behind it.”
“I never trust data 100 percent, and you never should either. There is always some uncertainty.”
“It is easy to be aware of all the bad things happening in the world. It’s harder to know about the good things; billions of improvements that are never reported.”
“We are subjected to never-ending cascades of negative news from across the world: wars, famines, natural disasters, political mistakes, corruptions, budget cuts, diseases, mass layoffs, acts of terror. Journalists who reported flights that didn’t crash or crops that didn’t fail would quickly lose their jobs. Stories about gradual improvements rarely make the front page even when they occur on a dramatic scale and impact millions of people.”
“The news constantly alerts us to bad news in the present. The doom-laden feeling this creates is then intensified by our inability to remember the past; our historical knowledge is rosy and pink and we fail to remember that, one year ago, or tens years ago, or 50 years ago, there was the same same number of terrible events, probably more.”
“When you hear about something terrible, calm yourself by asking, If there had been an equally positive large positive movement, would I have heard about that? Even if there had been hundreds of larger improvements, would have I of heard? Would I ever hear about children who don’t drown? Can I see a decrease in child drownings, or in deaths from tuberculosis, out of my window, or on the news, or in a charity’s publicity material? Keep in mind the positive changes may be more common, but they don’t find you. You need to find them, and if you look at statistics, they’re everywhere.”
“When looking at a stone flying toward you, you can often predict whether it is going to hit you. You need no numbers, no graphs, no spreadsheets. Your eyes and brain extend the trajectory and you move out of the stone’s way. It’s easy to imagine how this automatic visual forecasting skill helped our ancestors survive. And it still helps us survive: when driving a car we constantly predict where other cars will be within the next few seconds. But our straight line intuition is not always a reliable guide to modern life.”
“To understand a phenomenon, we need to make sure we understand the shape of its curve. By assuming we know how a curve continues beyond what we see, we will draw the wrong conclusions and come up with the wrong solutions.”
“When we are afraid we do not see clearly”
”None of us have enough mental capacity to consume all the information out there. The question is, what part are we processing and how did it get selected? And what part are we ignoring? The kind of information we seem most likely to process is stories; information that sounds dramatic.”
“The media can’t waste time on stories that won’t pass our attention filters.”
“If we are not extremely careful, we come to believe that the unusual is usual; that this is what the world looks like.”
“Of all our dramatic instincts, it seems to be the fear instinct that most strongly influences what information gets selected by news producers and presented to us consumers.”
“If we look at the facts behind the headlines, we can see how the fear instinct systematically distorts what we see of the world.”
“The fear instinct is a terrible guide for understanding the world. It makes us give our attention to the unlikely dangers that we are most afraid of, and neglect what is actually most risky.”
“To control the fear instinct, calculate the risks.”
“It is pretty much a journalists’ professional duty to make any given event, fact or number sound more important than it is.”
“The most important thing you can do to avoid misjudging something’s importance is to avoid lonely numbers. Never, ever leave a number all by itself. Never believe that one number on its own can be meaningful. If you are offered one number, always ask for at least one more. Something to compare it with. Be especially careful about big numbers.”
“Beware of exceptional examples used to make a point about a whole group .. ask whether an opposite example would make you draw the opposite conclusion. If you are happy to conclude that all chemicals are unsafe of the basis of one unsafe chemical, would you be prepared to conclude that all chemicals are safe on the basis of one safe chemical?”
“Beware of vivid examples. Vivid images are easier to recall but they might be the exception rather than the rule.”
“We must try hard not to generalise across incomparable groups. We must try hard to discover the hidden sweeping generalisations in our logic. They are very difficult to discover. But when presented with new evidence, we must always be ready to question our previous assumptions and re-evaluate and admit if we were wrong.”
“Be prepared to update your knowledge. In the social sciences even the most basic knowledge goes off very quickly.. In 1996, a minority of 27 percent supported same-sex marriage. Today that number is 72 percent and rising.”
“A small change every year can translate to huge numbers over decades.”
“Some knowledge goes out of date quickly. Technology, countries, societies, cultures, and regions are constantly changing.”
“Forming your worldview by relying on the media would be like forming your view about me by looking only at a picture of my foot.”
“Being always in favour of or against any particular idea makes you blind to information that doesn’t fit your perspective. This is usually a bad approach if you like to understand reality… Instead constantly test your favourite ideas for weaknesses. Be humble about the extent of your expertise. Be curious about new information that doesn’t fit, and information from other fields. And rather than talking only to people who agree with you, or collecting examples that fit your ideas, see people who contradict you, disagree with you, and put forward different ideas as a great resource for understanding the world."
“When I know, for example, that all the population experts agree that population will stop growing somewhere between 10 billion and 12 billion, then I trust the data. When I know that economists disagree about what causes economic growth, that is extremely useful too, because it tells me I must be careful; probably there is not enough useful data yet, or perhaps there is no simple explanation.”
“Its better to look at the world in lots of different ways.”
“Though we absolutely need numbers to understand the world, we should be highly skeptical about conclusions derived purely from number crunching.”
”Resist blaming any one individual or group of individuals for anything. Because the problem is that when we identify the bad guy, we are done thinking. And it’s almost always more complicated than that.”
“When we are afraid and under time pressure and thinking of worst-case scenarios, we tend to make really stupid decisions. Our ability to think analytically can be overwhelmed by an urge to make quick decisions and take immediate action.”
“The future is always uncertain to some degree. And whenever we talk about the future we should be open and clear about the level of uncertainty involved.”
“While it is truly pointless worrying about something unknown that we can do nothing about, we must also stay curious and alert to new risks, so we can respond to them.”
“Beware of fortune tellers. Any prediction about the future is uncertain. Be wary of predictions that fail to acknowledge that. Insist on a full range of scenarios, never just the best or worst case. Ask how often such predictions have been right before.”
“Being humble, here, means being aware of how difficult your instincts can make it to get the facts right. It means being realistic about the extent of your knowledge. It means being happy to say “I don’t know.”. It also means, when you do have an opinion, being prepared to change it when you discover new facts.”
“Being curious means being open to new information and actively seeking it out. It means embracing facts that don’t fit your worldview and trying to understand their implications. It means letting your mistakes trigger curiosity instead of embarrassment.”
“What you learn about the world at school will become outdated within 10 or 20 years of graduating. So we must find ways to update adults knowledge too.”
Everything we do in daily life revolves around our learning. And Rosling believes that what we have learnt in the past clearly has a ‘use-by-date’ attached. Basically that means all our known information can become obsolete. That also means we cannot rest on our laurels and must accept that as humans we can never stop learning. The trap with this is that nowadays we have to sift through all the data out there for the kernels of truth or facts, rather than accept all the information at face value.
There is a wealth of critical truth in all of the above which only reinforces my thinking about facts vs stories. Beware a sample size of one. The media’s professional purpose is to be make something more sensational than it really is. We only hear about the negatives, never the positives. Question the assertions of others; never accept what they say as fact until you have proven it so. And as humans we have a very unhealthy appetite for drama and stories.
I really like Rosling’s opinion on how we are wired the same way we have always been wired - to socially interact and hunt just as our prehistoric ancestors did. And we are still hunting; as humans, or investors, we are constantly seeking new information that will allow us to survive. Whether its factual or not is another matter altogether.
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