I travel quite a bit in my line of work, and many of those are short trips to cities I’ve never been before. This means a fair amount of variability in my commute times. So, when I’m back home in Mumbai, travelling from home to my own office, I prefer predictability. Mumbai’ites measure travel in terms of time and not distance, because, depending on the time of day, innocuous sounding 3-4 km stretches of road could take the best part of an hour to navigate. For me, time spent in traffic is the worst possible use of one’s morning.
I experimented with different departure times to identify the latest I can leave home while minimizing time spent in transit and reaching office by a certain time. With some trial-and-error, I identified 8.10am as my deadline after which I have to resign myself to spending over 90 mins of my morning in serpentine traffic.
This is my little version of simplified reality. Belief in this simple “model”, works reasonably well for me, in that it ensures I leave home before the dreaded hour and more often than not make it in reasonable time (by Mumbai standards) into office. Fact is there have been cases when I’ve left before 8.10am and spent 90 minutes in traffic and (albeit fewer) cases when I’ve been delayed and left around 8.30am and got to office in under 70 mins, significantly sooner than my so-called model suggests. But I dismiss those deviations as aberrations caused by “abnormal” circumstances such as a visiting bureaucrat or some kind of gridlock formed upstream that’s made my ride quicker. Turns out, when it comes to planning my daily office commute, I’m a hedgehog. Let me explain…
I recently came across reference to a study conducted by a professor at University of Pennsylvania, the results of which he published in 2005 in his book Expert Political Judgment (How good is it? How can we know?). In the study, Tetlock interviewed a lot of experts who made their living commenting on or offering advice on political and economic trends. He asked them to assess probabilities of various events that could occur in the not-too-distant future. Things like would the US go to war in the Persian Gulf? Which country would be the next big emerging market?…
For each case, respondents were asked to rate the probabilities of three scenarios: status quo, more of something (e.g. economic growth rate) or less of that same thing. He also asked the experts how they arrived at their prediction and also how they reacted when proven wrong.
The results showed that experts performed worse than if a lay-person had assigned equal probabilities to each of the three scenarios or potential outcomes for each question.
When compelled to admit error, the experts had a large collection of excuses ranging from they only got the timing wrong to an unforeseeable event had intervened
Tetlock inferred that people who acquire more knowledge develop an enhanced illusion of skill and become unrealistically overconfident. Thus, in this age of hyperspecialization, there is no reason for supposing that an expert is any better than an attentive reader. Experts are just human, dazzled by their own brilliance and hate to be wrong
In his seminal book ‘Thinking, Fast and Slow‘, Daniel Kahneman summarizes Tetlock’s study by referring to Isaiah Berlin’s essay on Tolstoy “The Hedgehog and the Fox”
Hedgehogs know “one big thing” and have a theory about the world; they account for particular events within a coherent framework, bristle with impatience toward those who don’t see things their way, and are confident in their forecasts. They are also especially reluctant to admit error. For hedgehogs, a failed prediction is almost always “off only on timing” or “very nearly right.” They are opinionated and clear, which is exactly what television producers love to see on programs. Two hedgehogs on different sides of an issue, each attacking the idiotic ideas of the adversary, make for a good show.
Foxes, by contrast, are complex thinkers. They don’t believe that one big thing drives the march of history (for example, they are unlikely to accept the view that Ronald Reagan single-handedly ended the cold war by standing tall against the Soviet Union.) Instead the foxes recognize that reality emerges from the interactions of many different agents and forces, including blind luck, often producing large and unpredictable outcomes. It was the foxes who scored best in Tetlock’s study, although their performance was still poor. But they are less likely than the hedgehogs to be invited to participate in television debates.
When it comes to your investment philosophy and stock-picking strategy, do you have one unifying theory that predicts the performance of stock markets the world over and your investments? Or do you allow for the inherent unpredictability of a system that the interaction of millions of participants brings about?
I’m glad I don’t plan by investments the way I do my office commute.
So, are you a hedgehog or a fox?