In Word and Object, Quine made Neurath’s boat analogy famous. It compares the holistic nature of language and consequently scientific verification with the construction of a boat which is already at sea.
“We are like sailors who on the open sea must reconstruct their ship but are never able to start afresh from the bottom. Where a beam is taken away a new one must at once be put there, and for this the rest of the ship is used as support. In this way, by using the old beams and driftwood the ship can be shaped entirely anew, but only by gradual reconstruction.”
This powerful analogy applies in most areas of life, I think, investing included.
The world we live in is profoundly complex and is much more difficult for us to navigate than we usually think or assume. As Dan Kahneman put it, “We systematically underestimate the amount of uncertainty to which we’re exposed, and we are wired to underestimate the amount of uncertainty to which we are exposed.” Accordingly, “we create an illusion of the world that is much more orderly than it actually is.”
Our ability to forecast the future, much less control the future, is extremely limited and is far more limited than we want to believe. We simply misapprehend (or ignore) the data. Instead, we concoct stories — often wonderful stories — to provide an interpretive framework for our forecasts, expectations and decisions. These stories are much more compelling than the actual data, which is discouraging at best. Stories sell better.
We are in a season of stories. In the investment world, these stories will come in the form of year-end letters (often designed to justify performance that wasn’t quite up-to-snuff), projections, forecasts, “best of” lists and expectations. The data (such as it is) will be handled with great care — comparisons to measures that can be beaten (or nearly so), for example — with thoughtfully wrought stories as explanation (such as “we were right, but too early”).
Kahneman again: “we can expect people to be way overconfident, because they have that ability to tell good stories, and because the quality of the stories is what determines their confidence. The extent of that overconfidence is actually quite remarkable.”
Those of us who are honest with ourselves and others will be left trying to muddle through, building portfolios and managing money like Neurath’s boat — making adjustments on the fly while trying to keep the whole thing afloat, keeping our promises and expectations grounded in the limiting reality of the data. It isn’t a good recipe for sales success. But it helps me sleep at night.
We would all like progress and thus real success to come more quickly, more cheaply and more comprehensively than reality allows. And if success comes, we desperately tell ourselves it’s because we’re really good and not because we’re really lucky.
We are always tempted and too often swayed by the shiny new object — the next “silver bullet” — that will make things right. Sadly, life doesn’t seem to work that way very often. No matter what our stories say.
Here’s to a New Year of muddling through but doing so with integrity, one beam at a time.