Thursday, January 14, 2021

Assumption Variance

 This will be a boring article that will quickly go into my backgrounder.

Everything in life requires assumptions.  We make assumptions and then proceed.  Our brain has a built-in physics engine programed like a video game.  When we brake our car, we know the deceleration.  If there is the tiniest thing wrong in the actual performance, then we go to the mechanic.

That is why we transfer our physics experience to everything else.  For example 'Momentum Investing', the assumption that what is going up must continue to go up.  In real life, we do have momentum, mass and energy.  In assets, not so much.

We can't stand it when the newspapers always tout - 'Going up, up, up.'  'Hot, hot, hot'.  This combines with our 'Fear of Missing Out', which is even greater than our fear of loss.  Thus, we'll always have people pouring in money at the peak of gold, bittycoin, or real estate.

I had a career in engineering and geophysics.  My big problem was that I was always testing assumptions.  But to do that, you must list the assumptions that may or not be wrong.  People in power (power people) never want the assumptions challenged, because they built their whole power base pushing those assumptions.  I was always right when I changed an assumption and then it was force-tested, but these were small things.  I could never get money to test the big assumptions.

Power people operate like the legal system, with case law, and consensus ruling the roost.  They can't go wrong if they follow the crowd.  If something goes wrong, they shrug, and say 'Who knew?'.  Unfortunately, this is now the rule for everybody, forced by social media.  Nobody can live in a social island, except the single musketeer.  That cost him a lot of money, which he is getting back now.

So, we live in a world where all assumptions are sacred, like the creeds of faith.  As I say for my kids, they only learn when they are hit by a 2x4.  It's amazing that we have many, many 2x4's coming to hit us.  


Brent said...

Well said.

Harold Asmis said...

We are in an era where 'group think' is a very heavy hand. That caused the shuttle disasters - o-rings are always fine, and will cause many more disasters.

Brent said...

Are you expecting the sea Ice Thickness to move hard or a little bit over the next couple of weeks. Brrrr.

Harold Asmis said...

The ice volume is going up at a normal rate. I was expecting it to turn up steeper, but those weak plumes are hanging over the Arctic and doing something. This wasn't a failed assumption, but a failed projection. :)

Penny said...

I didn't think this was boring.

"It's amazing that we have many, many 2x4's coming to hit us."

And best not to dwell to much on them either- learn the lesson and move on.

Harold Asmis said...

Who's learning? It's my hope that after a series of big physics disasters, we might go into a better cycle. Not my kids, but maybe their kids. :)