In his important (to philosophers anyway) 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.”
A philosophy professor I had in college would ask whether this wholly reconstructed boat was the same boat as it had been before. He’d then go on to ask if — since all the molecules in our bodies turnover within a number of years — our “wholly reconstructed” selves are continuous entities.
But I think this analogy more powerfully applies to how we live our lives generally (as opposed to how “we” live “our” lives) and to many specific endeavors, such as investing. In the investing world, we need to keep on making adjustments on the fly in real-time. We need to rebuilt the boat while at sea.
The world we live in is profoundly complex and is much more difficult for us to navigate than we usually think or assume. According to Dan Kahneman, “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. That’s why the planning fallacy is such a constant and monumental problem. We simply misapprehend (or ignore) the data far too often. Instead, we concoct stories — often wonderful stories — to provide an interpretive framework for our forecasts, expectations and decisions. That framework is necessary for us to “sell” our stories and ourselves.
We are in a season of competing stories. Bulls have their stories. So do bears. Traders have very differently focused stories. So do long-term investors. Politicians have stories. Even Fed chairmen have stories. In the investment world, these stories will come in the form of client letters (often designed to justify performance that wasn’t quite up-to-snuff), projections, forecasts, “best of” lists, Twitter feeds, sound bites, CNBC appearances, podcasts, blog posts, reports 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” or “it was the most likely scenario but…”).
Our success stories — when we’re lucky enough to have them — have lives of their own, too. We love to say things like “as I expected/predicted/forecast…”. Of course, being right isn’t the same as being right for the right reasons — even if and when we can discern causality with some degree of certainty. Because the markets offer so many false positives, we’re usually better off learning from our errors and failures than our successes.
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.” And when the performance numbers suggest success — whether real or not — we’re going to proclaim it confidently and from the rooftops. It’s very often better to be lucky than good.
Those of us struggling to be honest with ourselves, others and the investment process will be left trying to muddle through, building portfolios and managing money like Neurath’s boat — adapting on the go while trying to keep the whole thing afloat and moving in the right direction, keeping our promises and expectations grounded in the limiting reality of the data. It isn’t always 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 (as opposed to when “challenges” arise — that’s bad luck).
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.