In search of critical thinking

24 January 2019

By Lorenzo Dicorrado, fund manager

Behavioural economics teaches us that investors are often their own worst enemies via heuristics, biases and a general lack of control over their emotions. The instincts that worked in the plains of Africa 150,000 years ago do not work in financial markets and other aspects of modern life (like buying insurance!).
In our never ending quest to improve ourselves and our operating framework, we are proud students of human psychology and fact-based views of the world. This means that we try to learn from people who think critically, within and outside the world of finance.

I recently read Hans Rosling’s book, FACTFULNESS, about world health but it is actually much more than that; it covers the value of humility, reliable evidence, curiosity and, ultimately, critical thinking. These values transcend profession or field of study. Values which we, as investors, hold sacred. Below is a short chapter from this wonderful book and I hope you will agree that these words might as well have come from psychologist Daniel Kahneman or investors like Howard Marks:

The Single Perspective Instinct

"We find simple ideas very attractive. We enjoy that moment of insight, we enjoy feeling we really understand or know something. And it is easy to take off down a slippery slope, from one attention-grabbing simple idea to a feeling that this idea beautifully explains, or is the beautiful solution for, lots of other things. The world becomes simple. All problems have a single cause – something we must always be for. Everything is simple. There is just one small issue. We completely misunderstand the world. I call this preference for single causes and single solutions the single perspective instinct.

For example, the simple and beautiful idea of the free market can lead to the simplistic idea that all problems have a single cause – government interference – which we must always oppose; and that the solution to all problems is to liberate market forces by reducing taxes and reducing regulation, which we must always support.

It saves a lot of time to think like this. You can have opinions and answers without having to learn about a problem from scratch and you can get on with using your brain for other tasks. But it’s not so useful if you like to understand the world. Being always in favour of or always against any particular idea makes you blind to information that doesn’t fit your perspective. This is usually a bad approach if you like to understand reality. 

Instead, constantly test your favourite ideas for weakness. Be humble about the extent of your expertise. Be curious about new information that doesn’t fit, and information from other fields. And rather than talking only to people who agree with you, or collecting examples that fit your ideas, see people who contradict you, disagree with you, and put forward different ideas as a great resource for understanding the world.”
The single perspective instinct is also a tempting shortcut in investing which can lead to incomplete pictures and eventually big mistakes. On the Global Value team we fight this instinct via the application of continuous thesis discussion and a structured note format, where the key drivers as well as the investment context are isolated and dissected.
I encourage you to read this book and watch Hans Rosling’s highly entertaining TED talks. Happy Learning.

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