With the end of the boating season in northern Georgian Bay, I am now invested in a regime of intense reading - at least five hours a day. Most of the reading is directed along the lines of the following themes:
- market instability (I figure that it is prudent to prepare for a correction)
- sector studies: robotics, agriculture, mining, water, specialized manufacturing
- safe haven strategies
- risk management and uncertainty
In the course of this reading, I came across a real gem - one of the best essays I have read in years on things financial. It opened a new door and influenced my thinking significantly.
Investing in the Unknown and the Unknowable by Richard Zeckhauser.
Here is the first paragraph of the abstract:
From David Ricardo making a fortune buying British government bonds on the eve of the Battle of Waterloo to Warren Buffett selling insurance to the California earthquake authority, the wisest investors have earned extraordinary returns by investing in the unknown and the unknowable (UU). But they have done so on a reasoned, sensible basis. This essay explains some of the central principles that such investors employ. It starts by discussing “ignorance,” a widespread
situation in the real world of investing, where even the possible states of the world are not known. Traditional finance theory does not apply in UU situations.
The essay is comprehensive with sections entitled:
Risk Uncertainty and Ignorance
Behavioural Economics and Decision Traps
Math Wizzes in Finance and Cash Management
Investing with Someone Else on the Other Side
A Buffet Tale
The essay concludes:
This essay offers more speculations than conclusions, and provides anecdotal
accounts rather than definitive data. Its theory is often tentative and implicit. But
the question it seeks to answer is clear: How can one invest rationally in UU
situations? The question sounds almost like an oxymoron. Yet clear thinking
about UU situations, which includes prior diagnosis of their elements, and
relevant practice with simulated situations, may vastly improve investment
decisions where UU events are involved. If they do improve, such clear thinking
will yield substantial benefits. For financial decisions at least, the benefits may be far greater than are available in run-of-the-mill contexts, since competition may be limited and prices well out of line.
To my mind, it is a tour de force: beautifully written, with ideas presented in contexts which stimulate further thought. I plan to read it at least five times over the next several months ... it is that useful. A literary ten bagger!
Readers may wish to explore more of his writing:
Zeckhauser Home Page
During my voyage, I ventured into several new ports, including: The Irrational Economist: Making Decisions in a Dangerous World, edited by Erwann Michel-Kerjan and Paul Slovic. The book is a compilation of articles by accomplished thinkers, including Richard Zeckhauser.
The books explores aspects of the following dilemma:
... As human beings, we have intuitive and analytic thinking skills that work beautifully, most of the time, to help us navigate through life and achieve our goals, individually and collectively. But sometimes our thinking skills fail us.
The very modes of thought that are highly rational most of the time can get us into big trouble when the nature of the environment surrounding us, or the time horizon on which we make decisions, changes. We are also fundamentally influenced by short-term rewards, by what others do, and by what is at stake and how we feel when we make these decisions.
....
The challenge before us now is to better understand when and how rationality fails in this modern world. (pp 5-6)
In summary, the book presents a variety of perspectives about risk and, for that alone, is well worth reading. It is a treasure trove of scholarly thought. Another valuable aspect of the book is that it presented recommended reading at the end of each essay and fabulous sets of notes. Highly recommended.
Readers may wish to explore more of his writing:
Zeckhauser Home Page
During my voyage, I ventured into several new ports, including: The Irrational Economist: Making Decisions in a Dangerous World, edited by Erwann Michel-Kerjan and Paul Slovic. The book is a compilation of articles by accomplished thinkers, including Richard Zeckhauser.
The books explores aspects of the following dilemma:
... As human beings, we have intuitive and analytic thinking skills that work beautifully, most of the time, to help us navigate through life and achieve our goals, individually and collectively. But sometimes our thinking skills fail us.
The very modes of thought that are highly rational most of the time can get us into big trouble when the nature of the environment surrounding us, or the time horizon on which we make decisions, changes. We are also fundamentally influenced by short-term rewards, by what others do, and by what is at stake and how we feel when we make these decisions.
....
The challenge before us now is to better understand when and how rationality fails in this modern world. (pp 5-6)
In summary, the book presents a variety of perspectives about risk and, for that alone, is well worth reading. It is a treasure trove of scholarly thought. Another valuable aspect of the book is that it presented recommended reading at the end of each essay and fabulous sets of notes. Highly recommended.
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