Monday, June 13, 2016

Linear Paradoxes

Linear thinking is a paradox. That is to say it's paradoxical like many things in life. Things are not always what the seem, as Gilbert and Sullivan wrote: "Skim milk masquerading as whip cream." Or more recently a certain person masquerading as a President.

A+B = C is a process of linear thinking. It most certainly can work when A and B and C are numbers. Just as the reverse would be true: C-B = A. Numbers play a huge role in investing. But behind those numbers are people and despite what one might think, when A+ B = C are not numbers but Alfonso and Betty and Carl, linear thinking is nearly worthless.

Only cellar-dwelling economists with their econometric models think people behave rationally all the time. It's understandable. And it's comforting, like an evening glass of decent wine after a long, tedious day. But it's saddled with the same flaws as the Random Walk theory, humans can't outperform the numbers or averages. As a matter of fact they can and do, often outperforming the averages going up and going down. It's just that all humans can't do it and none can do it all the time, the worst nightmare of the PC tribe. No outliers allowed.

Despite all the nonsense of psychiatry and psychology studies we've had for years, they've yet figure out human behavior. One reason is they keep looking for ways to prove and they continue to assume humans in the main behave rationally, whatever that is. It makes them feel good and important when they have outliers whom they can label mentally sick or deranged. One can almost hear their sighs of relief. It's labeled employment. The so-call in-crowd, therefore, remaining folks, must be rational. What they fail to get is something called circumstances.

Here's a chart with a link to the rest of the article. One of the most obvious human acts of irrationality was inventing a 2,500 pound metal and fiber glass object that can go from 0-100 miles an hour in 10 or 20 seconds, putting a steering wheel behind it and then putting a human being behind the steering wheel.

Forget your religious preferences, if you have any. That's a real leap of faith. We could go on with cell phones, texting and GPS devices and what have you.The idea that people would use such rationally is probably buried somewhere in one of those economists' econometric models about the flood of high paying jobs the Fed has created since 2008.








https://realinvestmentadvice.com/wp-content/uploads/2016/06/Dalbar-Psychology-061316.png

After hanging around the investment world for more years than we care to recall, we can suggest (note the word, suggest) one piece of advice whether you're talking insurance company annuities or mutual funds or stocks and so forth that the author of this article captures in truth: The first major flaw in the plan is the “compounding” of annual returns over time which never happens. The second, and most important, is the future expectation of returns for individuals over the next 10-20 years.

These are all classic examples of linear thinking. Get sucked in with your own A +B = C thinking. Just be prepared to own it when you do.

davidstockmanscontracorner.com/why-the-next-decade-will-foil-financial-plans

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