Structured Thought

Millions of people tend to disregard folk wisdom as hackneyed and useless. An unfortunate consequence of modernity is that we are easily infatuated with our own knowledge and progress (look at all this ubercomplicated technology!). As a result, time-tested aphoristic wisdom gets discredited because it is not complex or sophisticated enough. We would all be wise to take a cue from Plato and always question the pervasive sophistry of modernity. Lies unravel. Simple truths stand the test of time, because over the centuries if they were discovered to be generally false, they would most likely fall by the wayside. We should never abandon our skepticism, but what good is the past if we cannot rely on it to be instructive? I know I'm not branching into uncharted territory by defending folk wisdom such as the phrase in question here, but sadly in this millennium I don't feel comfortable presuming everyone will simply nod their heads in agreement with honesty being the best policy. Allow me to make the case from a decision theory perspective. First, a lie uses up far more cognitive resources than a truth. Not only do you have to concoct something new, but also more than anything else you have to keep track of everything. One lie tends to beget another, and eventually as they add up the cumulative effect reduces your capacity to make quick decisions because you will have to check your actions against a catalog of past deceptions to make sure there is consistency, lest the whole web burn. Lying reduces your decision latency automatically and wastes valuable cognitive resources. It's hard enough to remember what happens, let alone what happens in reality and in the alternate reality of lies and the perceptions of others. Second, sometimes the most difficult decisions involve choosing between a truth and an untruth. You simplify your decision making process dramatically if you eliminate the possibilities that involve lying. Last, in order for your decisions to be effective, other people have to respect them. The easiest way to achieve this is to be open and honest with your process and rationale, to be a good listener and accept feedback and criticism with humility, and to be respectful of the decisions of others. Your decision making process and the implementation effectiveness of your decisions suffer from dishonest behavior.

Even without formal statistical training, virtually of us have been exposed to the notions of correlation and causation in one form or another. Unfortunately, these concepts are not properly understood by most folks and the result is absolutely disastrous. Let's look at some correlation patterns:

To say two items are correlated is to say that they tend to vary together in a linear way. The correlation formula yields 1 for data that follow an exact line with an upward slope, a correlation of -1 means the data follow an exact line with a downward slope, and a correlation of 0 means there is no linear relationship. As a technical side note, the technique involves solving for the line that best fits the data by adding up the square of the vertical distance between each data point and the line and minimizing that value.

For instance, cholesterol and risk of heart disease are positively correlated as are IQ and SAT score. Simple cases are all well and good, but problems arise when people mistakenly take correlation for causation. The problem with correlation is that doesn't say anything more robust about the variables than the fact that they are related. It could very well be that there is a confounding variable affecting both variables under consideration. Ice cream consumption and drowning deaths are indeed positively correlated, but the weather is a clear confounding variable. When it is hot, more ice cream is consumed and more people swim, resulting in more drowning deaths. It would be ludicrous to assert that banning ice cream would cut down on drowning deaths based on the correlation alone, but when people are not careful enough to distinguish between correlation and causality those sort of absurd decisions occur.

There are many statistical and econometric tools that have been developed in order to ascertain the true, causal relationships between variables. When you read about blind studies, double blind studies, control groups, or placebos, know that those are all standard techniques for avoiding the trap of conflating correlation and causality. The best approach is to remain skeptical of a conclusion based on correlation alone until you see more rigorous analysis. This is one of the easiest ways for people to be misled and lied to using numbers, and it's a dirty trick in part because it's so effective.

Our glittering age of technologism is also a glittering age of scientism. Scientism is not the same thing as science. Science is a blessing, but scientism is a curse. Science, I mean what practicing scientists actually do, is acutely and admirably aware of its limits, and humbly admits to the provisional character of its conclusions; but scientism is dogmatic, and peddles  certainties. It is always at the ready with the solution to every problem, because it believes that the solution to every problem is a scientific one, and so it gives scientific answers to non-scientific questions. But even the question of the place of science in human existence is not a scientific question. It is a philosophical, which is to say, a humanistic,

Owing to its preference for totalistic explanation, scientism transforms science into an ideology, which is of course a betrayal of the experimental and empirical spirit. There is no perplexity of human emotion or human behavior that these days is not accounted for genetically or in the cocksure terms of evolutionary biology. It is true that the selfish gene has lately been replaced by the altruistic gene, which is lovelier, but it is still the gene that tyrannically rules. Liberal scientism should be no more philosophically attractive to us than conservative scientism, insofar as it, too, arrogantly reduces all the realms that we inhabit to a single realm, and tempts us into the belief that the epistemological eschaton has finally arrived, and at last we know what we need to know to manipulate human affairs wisely. This belief is invariably false and occasionally disastrous. We are becoming ignorant of ignorance.

I'm a former investment banking analyst, so naturally when I think of a problem I try to use Excel to solve it (when the only tool you have is a hammer...). I'm a firm believer that a sizable proportion of poor decisions occur as a result of poor cost benefit analysis due to fundamental ignorance of probabilities. I think statistics should be part of the core curriculum because modernity requires constant analysis of probabilities and rarely ever requires factoring.

Here is a quick module you can put together in Excel to help simplify the decision making process. Say you want to figure out the expected impact of a decision and you have three potential outcomes. Assign each potential outcome a value (column C) and a probability (column D). Multiply the value of each outcome by the probability to get the expected value for that outcome, and then take the sum of the individual expected values (column E) to get the aggregate expected value (cell E8).

Most folks think about this process from a qualitative perspective (best outcome, average outcome, bad outcome), but they never do the math. As a result people make bad decisions because the relative probabilities are completely ignored. I don't write this math out explicitlyevery time I make a decision, but for anything that isn't a snap judgment I'll do some sort of mental math to figure out my estimate of the expected value.

Where this module becomes really useful is in complex cost benefit decisions where you have concrete numbers associated with outcomes (e.g. you are purchasing something and can spend $10, $20, or $50). From those numbers you can directly figure out the optimal way to proceed in expected value terms. In these cases it is likely that more than three outcomes are under consideration. To expand the array simply add as many new rows as necessary and perform the same mathematical operations. As long as the probabilities sum to 100% the table will be accurate.

People often make suboptimal decisions because we aren't used to looking at things from a probabilistic, expected value standpoint. Because I'm trained in statistics my brain is hardwired to think in such terms. It doesn't mean I always optimize my decisions, because of course the values and probabilities are also self-generated and most decisions are a bit tricky to quantify fully.

You can't only make decisions using math, but you can and should use math to help make better decisions.

The apocryphal quotation attributed to Woody Allen that '80 percent of success is showing up' has always been even more poignant than most people give it credit for. Here is a thought experiment to help find some crucial takeaways to improve decision making based on the principle of showing up.

Imagine a child learning to play a sport for the first time. For the child, the experience is totally novel. As human beings we face scenarios that are analogous, and the cue for recognizing such scenarios is the emergence of a thought or feeling of not knowing where to start. The guiding question of this thought experiment is how to maximize the child's potential at the sport in question.

In order to improve human beings need confidence, because there will always be obstacles of unknowable quantity and variety, and at certain points all of us make mistakes and fail either due to our own shortcomings, a bad break, or most often a combination of the two. We need genuine resiliency, because otherwise the obstacles themselves can seem so overwhelming that we stop pushing ourselves. Confidence builds resiliency.

So what's the best way to build confidence? The easiest answer in this case is the correct one: success. Once you have success at something and store that memory you have a stronger rational basis for having confidence simply on the basis of having accomplished that same something before. Taking it back to the child learning a sport, how do you fashion the initial success that kickstarts the virtuous cycle of accomplishment?

For this I turn to my good friend statistics. More precisely, I turn to the law of large numbers, one of my favorites. Some of the biggest challenges of human life arise from the fact that our time is precious. After not achieving success at something over an extended period of time, a greater and greater percentage simply stop trying for a variety of obvious reasons (opportunity cost, laziness, lack of resiliency, or simply just healthy reprioritization). In order to minimize the negative impact of these natural tendencies and to maximize the chance of ever achieving success we must first maximize the chance of experiencing a first example of success.

Now we have a more specific and practical consideration because the goal isn't nearly as vague. All that must be done is to go through enough repetitions so that the law of large numbers kicks in. If you are just learning how to shoot a basketball your shot will be dreadful, but then again even if you miss your first 500 shots the long term memory of the feeling of making one will be powerful. Luck and fortune ebb and flow, but there are extremely simple things all of us can do to put ourselves in the best position to eventually catch a break. There's a reason the first things you learn in sports are the fundamentals, and if you have good fundamentals and apply them consistently you will keep giving yourself chances to succeed.

Stepping back out of the thought experiment, we can look at life through a similar prism. There will be good breaks and bad, but there are basic things we can say that we are almost fully in control of. If we can do these small things right, the fundamentals, we should eventually experience a first success. The absolute fundamental is showing up. You have to be there in order to take the first 500 shots, even if they all miss. Sometimes it feels like the toughest thing in the world to do, but at least all of us know what showing up means. It's a simple concept, and so many of the obstacles we face on a daily basis are so complicated that one of the virtues of literally showing up is that most everyone can understand it.

A category error is the fancy way of saying 'comparing apples to oranges.' The most significant trap that we fall into in our reasoning and decision making is a simple category error that can be avoided once we are made aware of it. I used to make this error all the time when I was younger, and it wasn't until college when my worldview crystallized that I realized that this category error was responsible for many of my mistakes and had caused me to misjudge many situations. Emotional problems cannot be overcome by rational solutions alone.

If you find yourself facing a problem or difficult decision a good first question to ask is always 'what kind of problem is this?' Most people don't bother to ask this question and will jump in and go with their gut instinct. When I was younger my gut instinct was to default to the rational, scientific approach I had been taught and had grown comfortable with. I would find myself frustrated when that process failed to achieve results.

In hindsight, the knowledge that I had been looking for was there all along. The answer lies in observing how other people make decisions, by acting instinctively on their immediate reaction, a feeling or a hunch. The goal of proper decision making technique is to improve the process to the point where instinct can be trusted and hunches can be relied upon, but that comes only after the necessary emotional intelligence skills have been developed.

Therefore, empathy is a vital characteristic of an effective decision maker.

Our language has grown sloppy as a society, so I'll point out that empathy and sympathy are distinct concepts. In this context I mean empathy to be the ability to put oneself in another's shoes and identify their feelings. Individuals with a high capacity for empathy can literally feel the emotions of others and can use that information to make better decisions based on anticipating how others will respond to the decision.

Hint: If you are dealing with a problem or a decision and it involves other people in any way then there is typically going to be some emotional component to the decision, however minor it might be.

Given the ambitious title of this post, I believe a disclaimer is in order. This is not a foolproof solution, and past performance might not indicate future results, but here is a simple exercise that everyone can do to improve their self awareness and decision making on a daily basis.

Keep a journal

Maintaining a daily journal is an invaluable exercise if done properly and consistently over time. In the trading that I do professionally, best practices mandate extensive journal writing in order to manage preparation, catalog goals, and keep track of emotions throughout the day.

To my mind, the case for spending 10 to 15 minutes a day split between the morning and evening is unassailable no matter who you are or what you do. I will describe a simple journal routine that everyone can use and then I'll get into a brief explanation of why it is so helpful.

Journal Routine:

Write down the one item that is the top priority for you on the day, even if it is mundane

Write down the primary emotion you are feeling as you start the day

Rank your happiness level (1-10 scale)

Rank your energy level (1-10 scale)

Rank your stress level (1-10 scale)

Evening

Did you accomplish your top priority item?

A brief paragraph on any important details on the day

This routine doesn't take long, particularly once you get used to the flow of going through the exercise on a daily basis. If you have any sort of extended commute, that period is a perfect time to spend a few minutes on this (unless you're driving of course). Several benefits of making this a daily process are easy to pick out:

Your writing will improve when you force yourself to practice writing

Goal setting will improve in similar fashion as you practice setting goals

Your emotional awareness will improve

Your self-evaluation skills will improve

You can create with minimal daily effort a surprisingly thorough catalog of your personal experiences

The real power of this technique comes after you develop the self-awareness and emotional intelligence skills after you spend time acclimating to the process and making it your own. Once that occurs, you will have incredible data on how your self-perceived stress, energy, and happiness levels ebb and flow and what causes them to move around. Then you can use this data and intelligence to make better decisions because you will have a stronger sense of how they can impact important emotional facets of your life. Your decision making typically improves in the wake of more thorough and accurate information regarding the impact of your decisions.

A final note on using a journal is that everyone has their own best process. This specific checklist is more of a guide so that it will be accessible and useful to the widest possible audience. My actual journal for trading runs about 10 handwritten pages in an old school 100 sheet composition book. The sky is the limit here, and if you can change your routine you can change your life. Therefore, this is an easy way to change your life for the better in under 15 minutes a day.

A few months ago in an effort to improve my trading I developed a visualization / thought exercise to help overcome the temptation to be bothered by the plethora of potentially annoying things that happen to all of us on a daily basis.

Everybody knows that it's best to not worry about things that aren't really important, but here's a couple different options for use when you sense yourself feeling annoyed or irritated: Visualization: Close your eyes, take several deep breaths, and picture an anvil. See yourself with the anvil chained to one of your legs and watch yourself struggling to move. Now picture yourself without the anvil and watch yourself moving unimpeded. Next, visualize a padlock. See yourself moving practically unimpeded with one padlock holding you back. Now, add large bunches of padlocks until you struggle as much as with the anvil. Last, picture yourself looking back and severing the link between yourself and the padlocks and watch yourself move freely once again.

The metaphor of the anvil as a major impediment and the padlock as a minor one is fairly straightforward. The goal of the exercise is to hammer home the picture that minor issues indeed become major impediments when they compound. Thought Experiment: If you're not one for visualization, perhaps some numerical perspective will help. I ride the subways in Manhattan every day, and a large enough proportion of people don't know how to do so that I could exit the subway annoyed at least once a week.

If you're anything like me, when you're annoyed it is easier to get more annoyed (negative emotional feedback loop). As a result, minor things can cascade and your decision making can suffer as a result. Let's assume you fall into this annoyance cascade once a month for the purpose of demonstration. That means roughly 3% of the time your decision making will be impaired. That means if you live to be 80 you will spend approximately 2.5 years of your life in a suboptimal state of mind for decision making.

Considering the damage you can do with 2.5 seconds of bad decision making, 2.5 years out of a lifetime is an unacceptable outcome. It's not worth sweating the small stuff because it only takes one negative emotional cascade to create a bad decision, and some bad decisions are ruinous. We can't make perfect decisions every time, but it is certainly worth the effort to avoid hindering our decision making process because the subway wasn't running on time...

Because I think about thinking a lot I have historically fallen into the trap of overthinking. The problem is that when I overthink the quality of my decisions tends to suffer and my stress level goes up. My only evidence here is extensive personal experience. My solution is to pay attention to my thought process and use common sense.

The Golden Rule Of Overthinking: If you ask yourself "Am I overthinking this?" you are.

This appears trivial, but anecdotally I've been able to reduce my overthinking tendencies substantially by obeying this rule. This in turn has improved the quality of my decision making at the margins and has reduced the stress generated by the confusion of overthought. Here's what you do after you realize you're overthinking:

Close your eyes and focus on taking several deeper breaths. Then, after a few moments, ask yourself the only question that really matters: "Is this important enough to justify really struggling with?" That answer should be instinctive (Hint: if you're not sure, then it probably isn't). If yes, go back and work methodically. You should want to struggle with decisions because the important ones are difficult. You need to avoid struggling with trivial decisions.

Hopefully this technique can save you some time, because let's face it: life is too short to expend such effort needlessly.

All of us hold ourselves back by making detrimental decisions that we know are detrimental but make anyway. The easiest example of this is our dietary choices every day, but the concept is a bit broader. In order to make better decisions we need to realign our own incentive structure, sacrificing the short term habitual pleasures we find where we can and gradually making substitutions and alterations until a habitual behavior change occurs. Easier said than done obviously, but here's a thought exercise that I've used that has helped me: Whenever you think 'I know I shouldn't do this...' that is your trigger to cue the following sequence of questions and answer them honestly (takes about 10 seconds if you can be truthful with yourself, a crucial prerequisite of this technique being effective). Ask yourself: 1. Why do I want this? 2. How will I feel immediately afterward? 3. How will I feel in 24 hours? 4. How will I feel in 24 hours if I don't do what I think I shouldn't do? Habitually asking myself these questions (I was motivated by trying to answer the question of why sticking to a diet is difficult so I could stick to my diet better) proved to me that I rarely remembered the positive effects. Indeed it was the negatives that stuck with me. So why make a decision knowing that it has deleterious long term consequences for the sake of short term gains that won't even be memorable? Memory is such an important part of life, why sabotage future positive memories by making decisions having negligible positive effects that you don't typically remember or care about 1 day later let alone a year or 20 years later? It's worth noting that this isn't life-altering advice by any stretch of the imagination, but there were plenty of times when I found myself in a minor conundrum thinking to myself 'I know I shouldn't do this... (probably contemplating ordering food I didn't need to eat)' and when I went through this question track and line of reasoning I have been compelled to make better decisions. Part of that is just my personality (ie. this works for me because I've tailored it to appeal to my decision making process), but it's helped me out consistently so perhaps you can find a use for it. The most significant obstacle to improvement is that it is gradual. We have all gotten too accustomed to elevating the value of speed to the point that we occasionally do not give the gradual the respect it deserves.

Randomness is everywhere. From quantum fluctuations to lottery numbers, randomness is an unavoidable consequence of life. Fortunately, you can harness the power of randomness to improve your decision making as well as increase your emotional intelligence.

Ever had a discussion in a small group about what to do for a meal where everyone at the onset says they don't care but 15 minutes later you still don't have a plan? Here's a suggestion that seems silly at face value but is actually an extremely useful decision making tool: flip a coin.

In any case where you have two options to choose from and are ambivalent between the choices (50/50 preference) your preferences may indeed be 55/45 or 60/40. However, in minor circumstances when it doesn't make sense to do a full analysis of the pros and cons you may end up selecting a marginally inferior option because it is difficult to distinguish 50/50 preferences from 55/45. Sure, the impact isn't massive, but if you can improve your decision making process at the margins you can gradually improve outcomes. Here's how:

Assign one choice to heads and the other to tails and flip a fair coin once. Do not pay attention to the result of the coin flip; focus instead on your immediate reaction. If your first reaction is a negative one (disappointment, regret, or doubt), select the option that lost the coin flip. The reason this works is that rationally it is extremely difficult to rigorously separate 55/45 - 60/40 preferences, but your reaction to the coin flip is instinctive. This technique basically allows you to test your gut feeling. If your first reaction to the coin flip is positive or neutral then go with the choice that won.

Disclaimer: DO NOT USE THIS TECHNIQUE FOR MAJOR DECISIONS. This technique is designed to make sure you eat dinner at the right place. Picking which college to attend and other serious decisions demand a rigorous pros and cons analysis (although you could still test your gut instinct with the coin flip).

The bonus to this technique is that once you go through the exercise a couple dozen times you will be able to anticipate your reactions to the coin flip. I've used this approach for almost 5 years and I'm must more adept now at figuring out when I do indeed have a slight preference for a particular option as opposed to being ambivalent between two choices. Flipping coins has improved my emotional intelligence and led to many pleasant meals.

Final note: this technique can be expanded to decisions with more than one option by using another instrument of randomness (dice, Excel RandInt function, etc.)

Happy flipping!

Greetings!

Everybody and their grandmother has a blog these days, and now I do too. Every day all us humans make a myriad of choices that have impacts ranging from the fundamentally trivial to the extremely significant. The primary objective of this blog is to discuss the way people make these decisions and to offer some limited insight into techniques that can help make the decision process more efficient and effective.

Disclaimer: I am not a recognized expert on decision theory. I'm 25 years old and my highest academic degree is a BA in Economics and a BA in Mathematics & Statistics. My higher education took place at a liberal arts college. Since graduation I have been employed in financial services, first as an investment banking analyst and now as a proprietary intraday equities trader.

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