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More Than You Know, An Interview
Michael Mauboussin speaks with Columbia’s Ideas at Work magazine about some of the ideas in his recent book, More Than You Know: Finding Financial Wisdom in Unconventional Places.
In the book’s conclusion you mention some of the things the experts still don’t understand about investing. Can you talk about the directions for future research?
If you look at the world of finance, there are many, many open questions. For example, we don’t really understand how capital markets get to efficiency. There are some theories that are widely used in the world of finance, including mean-variance and no-arbitrage assumptions. I suspect these traditional ideas will eventually be superseded by this idea of complex adaptive systems, or the wisdom of crowds.
I think that the recent developments in neuroscience and decision making are absolutely fantastic. Another area that is really intriguing are the statistical regularities, like the power laws, that have come out of the study of physical systems, like earthquakes. In biological science, we know things like body mass and metabolic rate also follow a power law, a scaling property, and we have ways to explain those phenomena reasonably well. We see many of those same power laws in social sciences, yet we really have no causal mechanisms. So we don’t know why city sizes follow a power law or why the sizes of corporations follow a power law.
The last idea I’d mention is the flight simulator for the mind. One of the challenging things about investing is it’s very difficult to get timely and clear-cut feedback. If you’re a handicapper at the racetrack or you’re a weather forecaster, you get feedback pretty immediately on the decisions that you make, and that helps you calibrate and improve your decision-making process. When you purchase or sell a stock, you really don’t know in a timely fashion whether that decision was a good or a bad one. So an interesting question is whether we could create some sort of artificial environment that allows people to get better feedback on their decisions.
Read more: Guppies, ants and golf swings: Mental models for investors
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