I have regularly argued that in investing, as in most things in life, disconfirmation is more valuable than confirmation (see here, for example). In other words, we learn more from what doesn’t work than from what does. That’s largely because induction is the way science advances.
We want deductive proof, but have to settle for induction. That’s because science never fully proves anything. It analyzes the available data and, when the force of the data is strong enough, it makes tentative conclusions. But these conclusions are always subject to modification or even outright rejection based upon further evidence gathering. The great value of data is not so much that it points toward the correct conclusion (even though it does), but that it allows us the ability to show that some things are conclusively wrong.
In other words, confirming evidence adds to the inductive case but doesn’t prove anything conclusively. Correlation is not causation and all that. Thus disconfirming evidence is immensely (and far more) valuable. It allows us conclusively to eliminate some ideas, approaches or hypotheses. Continue reading
Above the Market 