Investment Decision Marking in the Face of Uncertainty

My research continues.  In the course of my reading, I have encountered a plethora of articles and books by academics.  Methinks that some of them, by necessity, develop rather closed constructs which do not fully reflect the actualities of decision making in times of uncertainty (if even one is alert to the possibility of untoward events).  This is why you see numerous behavioural experiments structured around "tight problems" with few dimensions using university students as experimental animals ... hardly a reflection of life lived by the vast majority of "deplorables".  Further, academics tend to delight in making things more complex than needed: how else would they find fodder to satisfy the publish or perish syndrome?

To my mind, the art of decision making starts by selecting the appropriate "thinking process" that is suited to the nature of the problem ... and that is a major task that I will start researching over the next few months.

When starting this research, I came across an interesting article by Justin Fox in the Harvard Business Review: Instinct Can Beat Analytical Thinking.

The lead-in reads as follows:

Researchers have confronted us in recent years with example after example of how we humans get things wrong when it comes to making decisions. We misunderstand probability, we’re myopic, we pay attention to the wrong things, and we just generally mess up. This popular triumph of the “heuristics and biases” literature pioneered by psychologists Daniel Kahneman and Amos Tversky has made us aware of flaws that economics long glossed over, and led to interesting innovations in retirement planning and government policy.

It is not, however, the only lens through which to view decision making. Psychologist Gerd Gigerenzer has spent his career focusing on the ways in which we get things right, or could at least learn to. In Gigerenzer’s view, using heuristics, rules of thumb, and other shortcuts often leads to better decisions than the models of “rational” decision-making developed by mathematicians and statisticians. 

Here are a few take-aways from the article:

• very simple heuristics often outperform complex statistical decision-making models in complex situations 
• there is a very lively debate about "System 1" which is fast, instinctive and emotional; and, "System 2" which is slower, more deliberative, and more logical. 
• heuristics can be used intentionally as opposed to subconsciously (gut feel approach)
• The problem of the heuristics and biases people, including much of behavioral economics, is they keep the standard models normative, and think whenever someone does something different, it must be a sign of cognitive limitations. That’s a big error. Because in a world of uncertainty, these models are not normative. I mean, everyone should be able to understand that.
• I hope that at some point, the economists turn around and realize that their models are good for one class of situations, but not for another. And also, that psychologists and also economists realize that there’s a mathematical study of heuristics.

The Harvard Business Review has a treasure trove of articles about risk and managing uncertainty.  I've only begun to sift through them.  I find that these short articles are especially useful in presenting general concepts concisely and providing leads for more detailed investigation.

Gradually, I will refine my thinking.  To date, the two best articles I have read about decision making are:

Howard Marks: Investing in an Unknowable Future

I especially like this as it comes from the pen of a very smart man with great experience in the investment world. 

 Investing in the Unknown and the Unknowable

An especially fine mind and an ability to provide a broad perspective.