“Neither fear nor awe is a productive response: both cut off questioning and the potential for gaining even a hint of understanding.” – Samuel Arbesman, Author
Whether we like it or not, our world is filled with very complicated systems. This is especially true of global capitalism. Picture an entity with the following characteristics:
- 15 million businesses;
- $300 trillion of financial assets;
- $80 Trillion of G.D.P.;
- 200 countries;
- Thousands of cultures and norms; and
- Billions of people with unpredictable emotional behavior.
There is no one human being or mathematical formula that is completely capable of understanding such dynamics.
As Samuel Arbesman, the author of Overcomplicated, states, “Even if we could eliminate our mental biases, or massively increase our brainpower, we are all still ultimately finite human beings.”
How can mere mortals begin to understand immensely complex systems that contain years and years of legacy components which have been mixed and matched to jell with the modern world? We are not even considering the emotional piece.
There is a reason our current tax code is hundreds of thousands of pages long, and there is no one person alive who could completely decipher its various riddles.
There are two choices on how to approach complex systems.; we can either fear or worship them. Neither is very appealing.
If we fear these structures, the results are paralysis, inaction, and bad decision making. It will be impossible to have an even limited understanding of what the hell is going on.
In global finance this means not participating in the stock and bond markets. Storing all your money in a mattress will guarantee a vicious destruction of future purchasing power. Unless you are a descendant of the Rockefellers, this will lead to a bare bones retirement lifestyle.
On the other hand, worshipping the system or becoming a fan boy of the technology can lead to even worse problems. Algorithms are imperfect, despite what their creators might say. Hero worship in the financial markets is life-threatening behavior.
Bernie Madoff, Long Term Capital Management, and housing prices that “never decline” are all stark reminders of the perils of financial genuflection before false idols. This behavior also destroys the spirit of inquiry which is the root of most monetary debacles.
Often we delude ourselves into believing we have an understanding of these complex systems. We love to plug numbers into a retirement calculator to give us the illusion of control over the billions of variables that will arise over the next few decades.
We watch the progress bar of a software update on our computer; mistakenly, we delude ourselves that we have some comprehension of what is actually going on inside our machines.
In both instances, we are soothed by a misleading perception that we understand a small piece of an opaque process. Black holes can be scary.
There is an alternative to combining mystery and wonder in our understanding of these intricate systems.
The answer is humility. In the words of Arbesman, “We must have humility without reverence and curiosity without fear.”
Humility recognizes limitations but does not paralyze us.
Being humble lets us observe complicated systems in a finite manner. It helps us to control what we can and ignore what we can’t.
Using humility as the cornerstone of our views of the global financial markets helps us to avoid:
- Forecasts of any type;
- The” Great Man” theory regarding investment managers; and
- Talking media heads with no skin in the game.
Understanding markets in a limited capacity will liberate energy to help us focus like a laser on the things we have some power over, such as:
- Investment fees;
- Tax consequences;
- Savings rates;
- Diversification; and
Humility frees our souls and comforts our conscious. It enables us to come to terms with an important concept: Regarding the markets, the best we can hope for is an incomplete understanding of how things work. This is especially true in the short run.
The knowledge that we cannot solve market uncertainty with a tidy physics equation is the best insurance you can ever purchase.
For most investors, a limited understanding of the whims of the markets, combined with a strong focus on the elements we can influence, will be more than enough for investment success.
Systems that are beyond human capacity to evaluate often produce the unexpected.
Lightning never strikes in a straight line.
Be humble and awed at times by the markets. Revel in the fact you know very little about the future.
This may just save you from a financial electrocution.