Insights from The Black Swan: Pt1

At present, I am re-reading some chapters of The Black Swan (TBS) by Nassim Taleb. In my first reading of TBS, I find it more philosophical than Taleb's last book 'Fooled by Randomness'. Which is why I did not dare to give a review. I do not want to review something I do not fathom.

I find TBS more provocative than other books. TBS may, at some point, trigger some thoughts of mine which will link TBS concepts to my real life investing.

In a previous post, I mentioned that TBS highlights the rear-view mirror or restrospective problem. That is, humans tend to theorize the past based on ex-post results. For example, historians may use the actual occurance of World War I (WWI) to highlight that the events before WWI can be used to predict WWI. This is a form of rear-view mirror theorizing as one looks for possible explanations for something that have happened, and one likely would dismiss randomness as one of its causes. (Research using bond prices indicates that the market did not expect WWI to happen.)

How does rear-view mirror theorizing relate to investing?

Upon stumbling on the idea of rear-view mirror (retrospective) theorizing, I find that I also fall into the rear-view mirror theorizing at times. For example, when Shanghai Asia run up to 27c -30c recently, I lamented that I should have seen the rise of Shanghai Asia occuring sooner or later. I should not have sold Shanghai Asia at 21.5c. But I later realize that at the time of sale, I would not have possible known that Shanghai Asia would run up 30-40% a month later.

Knowing the problem of rear-view mirror theorizing may help me to avoid blaming myself too hard in future when results show unexpected losses or omissions.

Rear-view mirror (retrospective) theorizing may also highlight the problem of linear thinking. That is, we may extrapolate past trends into the future and underestimating the uncertainty of the future. My example and past observations would tell me that due to the strong run-up in Sesdaq recently, people are getting very interested in penny stocks and expects more gains from penny stocks. I am thinking that these people may have fallen for the rear-view mirror (retrospective) theorizing trap. However, I also understand that the uncertainty of the future may prove me wrong and these people right if Sesdaq keeps on increasing.

In this case, awareness of rear-view mirror (retrospective) theorizing may only help one to be less confident in one's prediciton of the future and allow more margin of error. Hopefully, the additional margin of error may bring better results in the long run. However, it is difficult in practice that one will turn the awareness into some checking tool due to a few reasons. Possible reasons are recency bias, the herding tendency and the overconfidence tendency.

I would not be surprised if I fail to turn this awareness into a checking tool and remain as a over-confident investor (or more harshly, fool).

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