THE FINANCIAL PHILOSOPHER

The Financial Fallacy of Patterns, Causation & Correlation

"Nobody goes there anymore.  It's too crowded." ~ Yogi Berra

Is last week's Yankees win a bullish indicator for stocks?  Stock prices are at a 13-month high, does that mean that the market will continue to go up in the short-term?  Or are stocks due for a correction?  Do the answers to these questions really matter to your investment strategy?

Perhaps the greatest strength and simultaneous weakness of the human brain is its hard-wired tendency for pattern recognition.  Certainly this heuristic wiring aided in pre-historic man's search for food and avoidance of danger but does it translate to prudent financial decisions?  Not necessarily. 

In fact, pattern recognition might be the root cause of most economic and market bubbles (and bursts), including those leading to the current financial crisis. 

Those of you readers who are traders might counter my point by saying that momentum trading is real and can be quite foolish to ignore.  Nothing attracts a crowd like a crowd!  While this is true -- the crowd is "right" more often than it is "wrong" -- it also opens the door to peril -- to the confusion between causation and correlation and to the illusion of control.

"Death is caused by swallowing small amounts of saliva over a long period of time." ~ George Carlin

Humor, which I believe to be a form of philosophy, sure does have a way of illuminating the folly of human thought and behavior, doesn't it?

At root of searching for patterns and confusing causation with correlation is the philosophic term, fallacy, which is simply an instance of poor reasoning. 

Perhaps the most common fallacy, with regard to investing, is the gambler's fallacy.  For example, if a coin is tossed three times and it lands on heads each time, a large majority of people will detect a pattern and reason that the fourth toss will also be heads.  Perhaps a smaller group might reason that it will land on tails, citing that the odds are against another toss landing on heads.  Reasoning for both of these bets is fallacious because the chance of a coin landing on heads or tails is always 50%, regardless of the outcome (or number of) previous tosses.

With regard to investing, do Summer months cause stock prices to fall or is it just a period of time during most calendar years that is coincidental with weak stock market conditions?  For example, the "sell in May and go away" phrase is based upon historical stock price movement (patterns) and suggests an investor avoid stocks from May through October.  This year, however, the market, as measured by the S&P 500 jumped more than 18 percent from May 1 to November 1.

Of course, daily movement of the stock market is no toss of the coin and there are certainly times where technical analysis is more prudent than fundamental analysis.  Furthermore, there is another counter-argument to be made, with investing and trading, that there is no real reason to distinguish between causation and correlation. 

Essentially, the investor is looking for probability of an outcome. Regardless of how irrational the behavior may appear, all data must be considered because crowds often act irrationally.  If the crowd anticipates higher stock prices because the Yankees win the world series, then this event may feed more of an illusion that conditions are favorable to buy stocks, thus becoming a self-fulfilling prophecy of sorts.

"Too keen an eye for pattern will find it anywhere." ~ T.L. Fine

In summary, and as with everything, there is a balance to be found but this balance is only accomplished through self-knowledge and self-awareness.  To prevent a fallacious inference, one must be aware of the brain's tendency to find patterns; to take action on the pattern-based decision; and then to be given the illusion of control if the action is affirmed or "proves to be correct."

Put simply, do not be fooled by patterns!  In fact, don't even look for patterns because you'll find one every time and everywhere you look!

Man's (Career) Search for Meaning

"Ever more people today have the means to live, but no meaning to live for." ~ Viktor Frankl

Viktor Frankl himself believed that meaning -- the meaning of a sacrifice -- could be found in suffering.  I'm not so sure, however, that working in a stressful career to achieve higher monetary, material and social wealth fits Frankl's idea of finding meaning in sacrifice.  Unfortunately, however, this willful sacrifice of one's mental, physical and spiritual health for that of financial health is more common today than not.

With regard to money, the basic utility of your job or career is to earn enough money to pay for food, shelter and clothing with perhaps a modest amount remaining for life's little pleasures.  It is quite normal, however, to perceive the function of your career as something quite different -- as a tool to achieve material wealth far beyond what is necessary and to overlook the opportunity to do something significant -- to achieve your innermost latent desire -- to find meaning and purpose.  This common sacrifice of self for money, material wealth and social status is where problems begin:

• Life goals become defined by monetary goals -- or at least you perceive that money is the primary enabler for fulfillment;
• You make your life fit the demands of your career, rather than the opposite;
• And if you hate what you do, you rationalize the stress as a sacrifice for providing for your family, your retirement goals and/or your desire to identify yourself as somebody.

One or all of the preceding points likely have some degree of relation to your existence; but what can you do about it?

Where most attempts fail to make lasting and meaningful change (i.e. diets and budgets) is where they begin.  Your brain likes shortcuts -- lists of things to do -- that are quick, easy and painless.  If you could take a pill to lose weight, your brain wants this.  If you could read some quick tips on how to get rich and retire young, your brain wants this. 

In summary, the shortest distance between two points is not a straight line, except in your brain (and geometry)!  What your brain wants and what is good for you are not necessarily the same.  Your brain wants the path of least resistance, although what it needs is the path to a meaningful existence, and this requires self-knowledge -- choosing to use your mind rather than defaulting and yielding to the brain's wants.

Rather than looking for shortcuts and rewards, which may be your greatest detriment as a human being, start taking small and meaningful steps toward goals, the least of which should be defined in monetary terms, if at all.  Finding meaning in one's life can not be prudently obtained by shortcuts and lists of things to do.  Put simply, this meaning is acquired by aligning who you are with what you do, which first requires self-knowledge.

With regard to our underlying theme -- finding a career that is meaningful -- I like these resources:

• Self-knowledge is everything when it comes to career choice.  I believe the Myers-Brigg Typology Indicator, which is based upon the ideas of Carl Jung, is the best personality assessment tool.  Check out the Jung Typology Test for a good start.  This online tool also points you to occupations and educational resources based upon your personality type -- an excellent first step in aligning who you are with what you do.
• I like this list of the 50 Best Jobs in America.  The selection criteria is based upon pay and growth prospects but most importantly, meaningfulness.
• There is certainly no shortage of media coverage on the broad topic of productivity.  Unfortunately, the meaning of the term has been diluted to the degree that most people pursue productivity without first defining what it is they want to produce!  Productivity is not just doing more with less and productive people are not productive because they have read and followed a list of things to do on how to be productive.  They are productive because they have acquired self-knowledge -- they have identified their values and purpose and spend a significant amount of their time there -- in this sweet spot, if you will.  If you are not productive or successful in your work, you are probably not acting from your sweet spot of values and strengths.  You can find more on this topic at a previous post, Mind vs. Brain Part II: Priorities, Pursuits & Productivity.
• You might also try my Life Planning series of posts.  Follow the links to Life Planning Part I: Are you a tool?, Life Planning Part II:The Search for Meaning and Life Planning Part III: Creating the Plan.

Of course, this is simply the opinion of your humble author but my personal experience, my research for writing and my observation of others, collectively, tells me that Viktor Frankl was right:  Life is not primarily a quest for pleasure, as Freud believed, or a quest for power, as Alfred Adler taught, but a quest for meaning.

 

Hell is other people

"Hell is other people." ~ Jean-Paul Sartre

If you've not read this phrase before, your initial reaction might be something between an uncontrolled burst of laughter and a significant sense of curiosity.  Once the first reaction subsides, if your reaction is similar to mine, the profound truth of the phrase's message becomes inescapable as evidence of this truth begins flowing into your mind.

What makes hell other people?  If other people are hell, what is heaven? 

I also imagine you will acknowledge, however, that some of the greatest pleasures in your life have involved people outside of your self, perhaps in the form of service to those who appreciate and value what you have to offer.  It's just those other people that seem to always screw things up!

Here are some of my own observations and evidence, followed by the original source, of "hell is other people:"

• Other people are not very bright but this does not stop them from assuming responsibilities, such as driving cars, running for public office, voting, managing investments, teaching your children, or presiding over the company for which you work -- all of which obviously have great potential impact on your life!
• You work hard for your clients and maintain an altruistic and ethical standard of conduct while other people attract business (and perhaps some of your clients) with a less-than-ethical standard of conduct.
• You consider yourself a valuable employee but you are employed by other people who decide to "downsize" in the face of recession and you lose your job!
• You have a great idea (i.e. to start your own business or to improve something at your place of employment) but other people don't seem to agree with the greatness of your idea.  As a result, your idea fails, assuming it even launches, and you begin to question your own judgment, which erodes at your self-worth and reduces the chances of offering more ideas.

Given that "hell is other people," what is it that you believe "other people" in this phrase really represent?

The grip that other people have on our lives might derive from our deepest desire -- self-actualization.  Often, and to our detriment, our self-actualization is dependent upon the approval (or what we perceive to be approval) of others.  Our actions, therefore, are often a reflection of what we believe other people expect.  This also extends to our desire to control our own destiny and to find the things (money, material wealth, social status) that we perceive will provide this control -- this validation.

The original proclamation that "hell is other people" came from Jean-Paul Sartre, the 20th century French existentialist philosopher and playwright," and his play No Exit:  The three main characters in the play arrive in hell, a hotel, and discover that their fate is to spend eternity together in one small room.  The characters further discover that hell is not torture by fire and brimstone but torture by other people and the perception that there is no escape.

Why is hell other people?  Because, as Sartre has explained, "…when we think about ourselves, when we try to know ourselves, … we use the knowledge of us which other people already have."  In other words, if we are not recognized or if our individual pursuits and dreams are not validated by other people's approval, we often feel that our existence has less meaning or even that it is worthless.

Personally, I like the interpretation, and what Sartre himself has implied, that other people represent a purgatory -- a place that can be heaven or hell, depending upon one's own perceptions...   

If hell is other people, then it is because you have made it so -- it is because you have allowed other people to shape your reality.  Your self-actualization, in this hell, is completely dependent upon the approval of others.

You play a kind of game -- a game of illusion -- with other people.  You put forth an image that you think other people want to see which is often an illusion in itself: Your resume, your web site, your Facebook page, your clothes, your car, your house, your choice of words, your vacation destination and your presentations to prospective clients all present an illusion to meet the expectations and validations of other people.

As with anything, there is a healthy balance to be found. 

The balance to be found is that, to co-exist with other people, which is inescapable, you must play this game of illusion to some degree; but you must also remain aware that this game is in fact an illusion: The illusion you put forth must not be far from the truth or you will lose touch with your own reality and lose your self along the way; you must realize that others are playing this game of illusion and the perception of "winning" or "losing" must remain only in the minds of other people -- not in yours; and most importantly, do not become other people -- the people that define their existence -- their heaven or hell -- by the perceived expectations and validations of other people.

Hell, therefore, is not other people -- hell is being other people.  Heaven is being yourself...

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Related:

When is Illusion Good?

Quotes on Contentment

The Deconstruction of Social Conventions & The 'Unlearning' Process