The illusion of control and predictability

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nisiprius
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The illusion of control and predictability

Post by nisiprius »

Question. How long will it take me to travel to Omaha for the family get-together at Christmas in 2037?

If I ask this question, one might check some plane schedules. Or, one might say that based on the 450 mph "historical" rate of speed for passenger jet planes, an air distance of 1800 miles, and estimating an added 2 hours for connection in Cincinatti, it will be six hours.

But we all know there are frequently delays of an hour or two more, and around Christmas if you get a snowstorm you could get stuck in the airport for ten hours or more. Or they might be out of rental cars.

And a lot could happen in 25 years. Delta Airlines might have gone the way of Pan Am, TWA and Eastern.

Or my inlaws might have moved and be living in Taos instead of Omaha. Or I might not be on speaking terms with them. Or I might have the flu and be too sick to travel. Or we might be getting together at my brother's place in Syracuse that year.

The miserable "hub and spoke" system might have been supplanted by dense network of nonstop flights. Or a bullet train. Or maybe Internet technology and virtual reality (whatever happened to virtual reality? I miss virtual reality) will have developed to the point where ordinary families meet via telepresence.

And that's all well within the range of ordinary life uncertainty, no black swans--like a three-hour delay in customs at the border crossing between the two countries into which the former United States has split.

Why is it that when it comes to humble stuff, like traveling, we accept the limits of control and predictability, but when it comes to investing and retirement planning, we believe we can make precise numerical predictions? Exactly what is it about my medical expenses for the year 2037 that is any easier to plan than my travel time for Christmas 2037?

I think there might be a couple of answers. The first is that so much seems to be at stake that we can't tolerate the idea that the growth of $100,000 over 25 years might be just as flaky, uncertain, and subject to chance as travel. The second is that investing looks like it's all made of some uniform kind of stuff, it's all made up of numbers and money. Whereas we don't think of a trip as just being made up of uniform commodity called "time," we think of it as a cab and baggage check-in and a flight and a change and a flight and a car rental and...
Last edited by nisiprius on Tue Jul 31, 2012 3:31 pm, edited 1 time in total.
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Re: The illusion of control and predictability

Post by ddb »

nisiprius wrote:Why is it that when it comes to humble stuff, like traveling, we accept the limits of control and predictability, but when it comes to investing and retirement planning, we believe we can make precise numerical predictions? Exactly what is it about my medical expenses for the year 2037 that is any easier to plan than my travel time for Christmas 2037?
What is the basis for your premise that "we believe we can make precise numerical predictions" for something that will happen in 25 years? I haven't met anybody who believes that.

- DDB
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Re: The illusion of control and predictability

Post by xerty24 »

ddb wrote:What is the basis for your premise that "we believe we can make precise numerical predictions" for something that will happen in 25 years? I haven't met anybody who believes that.
Even the Congressional Budget Office, that bastion of forecasting and economic optimism, only goes 10 years out. 25 years is a long way.
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Re: The illusion of control and predictability

Post by scone »

"Why is it that when it comes to humble stuff, like traveling, we accept the limits of control and predictability, but when it comes to investing and retirement planning, we believe we can make precise numerical predictions? Exactly what is it about my medical expenses for the year 2037 that is any easier to plan than my travel time for Christmas 2037?"

Anyone who thinks about these things knows there is a lot of randomness and risk in any prediction. If you believe Taleb, we don't even know what risk is. But we certainly don't have the computing power to model the world at the level of precise detail implied by your trip analogy. (We might be able to manage a Sim game version, but that's all.) Much less model the infinite number of permutations that might fork off from any given point in time. So we take a guess based on simple arithmetic and hope for the best. We need the illusion of control to bolster our (illusion of?) hope, because without hope we wouldn't have the will to get up and face another day. :D
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Re: The illusion of control and predictability

Post by hsv_climber »

xerty24 wrote:
ddb wrote:What is the basis for your premise that "we believe we can make precise numerical predictions" for something that will happen in 25 years? I haven't met anybody who believes that.
Even the Congressional Budget Office, that bastion of forecasting and economic optimism, only goes 10 years out. 25 years is a long way.
Congressional Budget Office began operating in 1975. I suspect that nisiprius has started operating much earlier than that; thus, he needs to plan further ahead.
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Re: The illusion of control and predictability

Post by hsv_climber »

nisiprius, have you just finished reading Kahneman or what is the other event that happened that made you to make this post?

BTW, Kahneman's definition of luck & "regression to mean" can be totally applied to Michael Phelps, who loses on this Olympic in almost identical fashion as he was winning on the last one.
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Re: The illusion of control and predictability

Post by umfundi »

hsv_climber wrote:nisiprius, have you just finished reading Kahneman or what is the other event that happened that made you to make this post?

BTW, Kahneman's definition of luck & "regression to mean" can be totally applied to Michael Phelps, who loses on this Olympic in almost identical fashion as he was winning on the last one.
So much for your predictions. Phelps just won a gold medal. :D

You forgot that momentum counters reversion to the mean.

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Re: The illusion of control and predictability

Post by hsv_climber »

umfundi wrote:
hsv_climber wrote:nisiprius, have you just finished reading Kahneman or what is the other event that happened that made you to make this post?
BTW, Kahneman's definition of luck & "regression to mean" can be totally applied to Michael Phelps, who loses on this Olympic in almost identical fashion as he was winning on the last one.
So much for your predictions. Phelps just won a gold medal. :D

You forgot that momentum counters reversion to the mean.

Keith
What predictions? I was talking about losing by 0.0x sec. on 200m Fly today in exactly the same fashion he won 100 fly last Olympic and losing 4x100 in the exact same way as winning last Olympic.

His only gold so far was a result of US 4x200 team being 3sec. better than the rest of the world (btw, I think Phelps lost his leg to a French swimmer). 3 sec. is not luck, it is a skill. But 0.0x sec. is luck.
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Re: The illusion of control and predictability

Post by HueyLD »

ddb wrote:What is the basis for your premise that "we believe we can make precise numerical predictions" for something that will happen in 25 years? I haven't met anybody who believes that.
I think the commonly referred to "4% SWR" comes to mind. I frequently wonder if there is such a thing as a SWR given all the uncertainties in life?
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Re: The illusion of control and predictability

Post by GregLee »

nisiprius wrote:I think there might be a couple of answers. The first is that so much seems to be at stake that we can't tolerate the idea that the growth of $100,000 over 25 years might be just as flaky, uncertain, and subject to chance as travel. The second is that investing looks like it's all made of some uniform kind of stuff, it's all made up of numbers and money. Whereas we don't think of a trip as just being made up of uniform commodity called "time," we think of it as a cab and baggage check-in and a flight and a change and a flight and a car rental and...
It's an interesting perspective. Perhaps you should have made this a poll. I'm voting for #2, but not buying into the part about the simplicity of portfolio prediction being merely illusory.
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Nisiprius interprets Kahneman

Post by VictoriaF »

Nisiprius' example upholds Kahneman's availability heuristic. It is much easier to input some numbers into a spreadsheet and project them 25 years forward than to think of all possible ways of getting to Omaha in the year 2037.

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Re: The illusion of control and predictability

Post by scone »

"Nisiprius' example upholds Kahneman's availability heuristic. It is much easier to input some numbers into a spreadsheet and project them 25 years forward than to think of all possible ways of getting to Omaha in the year 2037."

And the problem gets even more difficult when you try to "incorporate" observer effects. Observer effects are not necessarily countered by programming into a computer. Behavioral biases are often enshrined into computer algorithms-- it's very difficult to dislodge them from such an exalted position.
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Re: The illusion of control and predictability

Post by pjstack »

ddb wrote:
nisiprius wrote:Why is it that when it comes to humble stuff, like traveling, we accept the limits of control and predictability, but when it comes to investing and retirement planning, we believe we can make precise numerical predictions? Exactly what is it about my medical expenses for the year 2037 that is any easier to plan than my travel time for Christmas 2037?
What is the basis for your premise that "we believe we can make precise numerical predictions" for something that will happen in 25 years? I haven't met anybody who believes that.

- DDB
Some people must believe it because this forum gets that sort of question all the time! ("I'm going to retire in 20xx, how much do I need to retire? What is a safe withdrawal rate? What is the inflation rate going to be?" Etc. etc.)
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Re: The illusion of control and predictability

Post by gabylon »

nisiprius wrote:...Exactly what is it about my medical expenses for the year 2037 that is any easier to plan than my travel time for Christmas 2037?...
I think they are just as easy to plan if you use the same standards for both. But usually, you don't. The crucial difference is, like you said, what is at stake. In most of the examples you gave for the Christmas trips, delays at the "border", bankrupt airlines, etc., the solution seems fairly simple. There is no anxiety about changing the airline, or even canceling the trip. So there is little harm in being wrong in your plans/ predictions. But can you afford to run out of money for your medical expenses? It is hard to accept the same uncertainty in both plans.
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Re: The illusion of control and predictability

Post by richard »

ddb wrote:
nisiprius wrote:Why is it that when it comes to humble stuff, like traveling, we accept the limits of control and predictability, but when it comes to investing and retirement planning, we believe we can make precise numerical predictions? Exactly what is it about my medical expenses for the year 2037 that is any easier to plan than my travel time for Christmas 2037?
What is the basis for your premise that "we believe we can make precise numerical predictions" for something that will happen in 25 years? I haven't met anybody who believes that.
Perhaps his basis is the posts on this board which appear to believe we can precisely calculate the odds of success for a withdrawal rate for the next 30 years or the numerous spreadsheets projecting historical data or making monte carlo calculations, often to one or two decimal places.
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Re: The illusion of control and predictability

Post by patrick »

I don't agree that we believe we can predict the future. When discussing investment returns we often use terms that clearly indicate unpredictability, such as expected return, standard deviation, risk, probability of success, and (for the more pessimistic among us) probability of ruin.

I also don't think travel 25 years from now is an appropriate analogy. Radical changes in transportation may well happen in the next 25 years, but we already have historical data on the stock market that includes periods of radical transportation changes. Also, note that the total market result represents averages rather than an individual case -- if you roll a pair of dice I can't predict the result, but if a million people do so I can estimate fairly closely what the average will be.
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Re: The illusion of control and predictability

Post by umfundi »

pjstack wrote:Some people must believe it because this forum gets that sort of question all the time! ("I'm going to retire in 20xx, how much do I need to retire? What is a safe withdrawal rate? What is the inflation rate going to be?" Etc. etc.)
It's the desire to create order. Numbers are more precise than opinions. So, we convert opinions into numbers, and then use those numbers to derive our opinions.

83.4% of people do this, so it must be correct, most of the time.

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Re: The illusion of control and predictability

Post by yobria »

You'd better start saving for that trip! But how much? Okay, we'll say it cost the same to travel there in 2037 as today, accounting for, say, 2.5% inflation. The money you invest will grow at 6%, give or take. Now we know how much per year you should be saving. Are these estimates going to be perfectly accurate? Assuredly not. Are they better than using a random number generator? I think so.
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Re: The illusion of control and predictability

Post by Fallible »

HueyLD wrote:
ddb wrote:What is the basis for your premise that "we believe we can make precise numerical predictions" for something that will happen in 25 years? I haven't met anybody who believes that.
I think the commonly referred to "4% SWR" comes to mind. I frequently wonder if there is such a thing as a SWR given all the uncertainties in life?
There is such a thing, but be ready for it to change a whole heck of a lot because of "all the uncertainties in life." My plans for early retirement were originally made with the 4% in mind until those uncertainties hit, including the market/housing crashes/crises. I started off withdrawing less than 4%, then more than 4%, then gradually nothing, then even saving again. And it will continue to change with more uncertainties in life, which are the only certainties. Or maybe I just never learned the right way to plan for retirement?
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Re: The illusion of control and predictability

Post by steve roy »

You project much beyond the next twelve months, you are probably going to be way off. And these days, even predicting what will happen one year from now is risky.
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Post by barefootjan »

Keith, awesome post. :)
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Re: The illusion of control and predictability

Post by umfundi »

barefootjan wrote:Keith, awesome post. :)
Thank you! :D

In the 1990's I worked at GM, and they were having issues that their vehicles were noisy. Except, noise is subjective - the exhaust noise from a Chevy V8 is fine, the noise from a 90 degree V6 is not. GM created a 10-point scale, called GMUTS, for subjective noise evaluation, and sent all the noise engineers to training. Suddenly, subjective evaluations became data! People would drive cars around, and the solemnly declare that engine noise was a 7.2 (OK) but road noise was a 5.4 (Bad). You could of course, average the GMUTS ratings from different engineers, and quote them with at least two decimal places. You could plot trends over time, and all sorts of wonderful stuff.

Collective insanity, but the Chief Engineers now had ammunition to throw at each other.

I am not making this up. Do a Google search on GMUTS Noise Rating, for example:
These noise levels were determined using General Motors Uniform Test Standard (GMUTS) R-15-104x2, which is a subjective, qualitative test which uses a 1-to-10 rating scale. On this scale, ratings of 2, 4, 6, 8, and 10 represent noise levels that are “Bad”, “Poor”, “Fair”, “Good”, and “Excellent”, respectively. When a transmission pump is tested for noise level using this GMUTS, typically the one or more trained technicians/engineers who are listening to the transmission will present their individual ratings of the noise, and the ultimate rating ascribed to the transmission pump's noise level will be an average or consensus of the various individual ratings. Typically, a change of ±1 on the GMUTS scale is equivalent to about ±3 dBA in sound pressure level, or about ±50% in measured sound pressure level. The “whine” rating shown in TABLE 1 refers to “launch whine”, which is the pump whine sound that may occur when the driver steps on the gas/accelerator pedal, as distinguished from “continuous whine” which is the whine sound that the transmission pump may produce continuously. The “gravel” rating refers to the “gravelly” sound sometimes produced by a transmission pump when there is a sudden acceleration, deceleration, or change in the pitch, roll, or yaw of the vehicle, such as when the brakes are slammed on by the driver, the vehicle suddenly ascends or descends a hill, the vehicle suddenly accelerates, etc.
"a subjective, qualitative test which uses a 1-to-10 rating scale" I can't imagine how anyone could have a problem with that.

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Re: The illusion of control and predictability

Post by nisiprius »

Re ddb's point. Yeah, I overstated things. We don't get people expecting precise predictions about the year 2037 in isolation. However, we do often hear expectations for high precision regarding cumulative numbers for the whole period. My point--which I think is valid--is that when we choose something like "a trip," we are easily aware of, and accept the distinctions between

a) --the predictable: the average time for this trip is 6 hours

b) --the statistically predictable: government data for on-time performance of airlines suggests that it follows a mumble distribution with a mean of mumble, a standard deviation of mumble, and a high positive skew.

c) --the qualitative changes that creep in as soon as you start discussing periods of time longer than about a year or so, the realization of the importance of black swans, the realization that over the next twenty-five years transportation is like to change in fundamental ways that will change the statistical model, and that these changes are as impossible to predict as what sports will be played in the 2036 olympics.

Have I read Kahneman yet? No, shame on me, but I've been talking to people who have.

What triggered the post? Nothing major, no one thing in particular.
--Most immediately, a thread here on SWR, another on Bill Gross's forecasts for the future, and an email conversation with some friends.

--The constant realization of just how different my actual experience in retirement has been from the numbers I plugged into the FIdelity Retirement Income Planner in 2007. Mostly financially better.

--In one's sixties, one is always reminded of mortality by the experiences of ones' friends and contemporaries. Alas, the suit I bought as an "interview suit" has been to more funerals than to intervals. In another thread I mentioned my 73-year-old seriously ailing friend who has never applied for social security. (IMHO THAT is what Bogle means when he says "Successful investing involves doing just a few things right and avoiding serious mistakes." It's not about whether you have a small value tilt, it's about not procrastinating for 11 years on applying for Social Security.)

--The mystery of poster bob90245, probably the forum's biggest non-professional expert on SWR and withdrawal strategies. He maintained an invaluable online collection of studies and links to studies, his overviews of same, and his personal research. He's stopped posting and his website cannot be found. I am hopeful for some explanation other than a sad one, but I feel that it will likely turn out that his retirement savings were sufficient to fund his retirement via almost any withdrawal strategy.

--Hypochondria. At my age stuff is constantly happening, and all of the following things are always true: a) It's probably nothing. b) Even if it isn't nothing, it's probably not a useful symptom that would lead to detection of something worth detecting early. c) But when The Big One does come along, it probably will be preceded by some silly little symptom just as innocuous. The latest is some tinnitus which is of no concern except for being new and unfamiliar and sounding different from the familiar very mild tinnitus I've had since age 20. (Yes, I've told my doc about it).
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Re: The illusion of control and predictability

Post by nisiprius »

umfundi wrote:Suddenly, subjective evaluations became data! People would drive cars around, and the solemnly declare that engine noise was a 7.2 (OK) but road noise was a 5.4 (Bad). You could of course, average the GMUTS ratings from different engineers, and quote them with at least two decimal places. You could plot trends over time, and all sorts of wonderful stuff.... Collective insanity, but the Chief Engineers now had ammunition to throw at each other. "a subjective, qualitative test which uses a 1-to-10 rating scale" I can't imagine how anyone could have a problem with that.
Sorry to be constitutionally argumentative and contrary, but it might or might not have been insanity, it all depends. In college I took a course on "communications biophysics" taught by Dr. Walter A. Rosenblith and we had readings and labs on psychophysics, and under some situations these sort of subjective ratings really can be amazingly quantitative. For example, put headphones on someone and put their finger on a Sonovox device--I'd call it a "vibrator" but people would snicker--play them tones at different loudness and tell them to adjust the intensity of the Sonovox vibration until it matches the loudness of the sound, and you get astonishingly precise, consistent results. A power law, and the exponent is the same for everybody. It can be said with some assurance, for example, that despite Weber and Fechner and the decibel scale, the relation between sound intensity and loudness is a power law, not logarithmic.

You can read about it, but you can't believe it really works until you have the headphones on you and your finger on the Sonovox and are turning the knob. Before you try it, you say "What do you mean, match the vibration to the loudness?" When you try it, you find that you know exactly how to do it and exactly what the "right" intensity is. It is weird.

Ah, it's all coming back. "Cross-modality matching." S. S. Stevens. Here's a 1959 paper. People were asked to indicate how strong a sensation was by squeezing a handgrip , and the different modalities had different power laws. It's a log-log scale but even so, the degree to which the data points fall on straight lines ain't half bad. My oh my, those pre-computer graphs--Rapidograph pen and Leroy lettering set, I expect...

Image

Image

I'm not saying your engineers and managers weren't insane, I'm just saying subjective observations can be amazingly quantitative.

Of course what the engineers should have done was to use the subjective ratings as grist, found objective measures that correlated well with the subjective ratings, and then moved on to using those objective measures. The subjective ratings could have been very meaningful in discovering how to measure what sounds bother drivers, versus what kinds of noise move the needle on a sound level meter.
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Re: The illusion of control and predictability

Post by jb1934 »

"Why is it that when it comes to humble stuff, like traveling, we accept the limits of control and predictability, but when it comes to investing and retirement planning, we believe we can make precise numerical predictions? Exactly what is it about my medical expenses for the year 2037 that is any easier to plan than my travel time for Christmas 2037?"

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Re: The illusion of control and predictability

Post by Patchy Groundfog »

I know I can't plan with precision a trip in 2037, but I don't have to. It won't make a bit of difference if wait until 2036 to think about it. I know I can't predict with precision what my finances will look like in 2037, but I can't wait until 2036 to think about it. I have to use the best knowledge I have now to make the best decisions I can, now. The heck of it is, I probably know a lot of things that just ain't so. Still, I have no choice but to peer forward into the mist as far as I can and try not to walk off a cliff.
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Re: The illusion of control and predictability

Post by hazlitt777 »

You ask a good question Nisiprius. In my opinion, we like to control our environment as much as possible. That is great, that is the stuff of progress to some degree. So we try to measure everything, even things that can not be strictly measured. I do believe there has been an excessive mathematicization of investing and economics. It creates the illusion of precision and the illusion that the long term is going to be the same as the last century in investing.

I have nothing against the use of charts and percentages etc. to measure elements involved in investing. I believe their is value in looking at historical returns. But one must never forget the caveats involved and plan accordingly.
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Re: The illusion of control and predictability

Post by tfb »

nisiprius wrote:Question. How long will it take me to travel to Omaha for the family get-together at Christmas in 2037?

If I ask this question, one might check some plane schedules. Or, one might say that based on the 450 mph "historical" rate of speed for passenger jet planes, an air distance of 1800 miles, and estimating an added 2 hours for connection in Cincinatti, it will be six hours.

But we all know there are frequently delays of an hour or two more, and around Christmas if you get a snowstorm you could get stuck in the airport for ten hours or more. Or they might be out of rental cars.

And a lot could happen in 25 years. Delta Airlines might have gone the way of Pan Am, TWA and Eastern.

Or my inlaws might have moved and be living in Taos instead of Omaha. Or I might not be on speaking terms with them. Or I might have the flu and be too sick to travel. Or we might be getting together at my brother's place in Syracuse that year.

The miserable "hub and spoke" system might have been supplanted by dense network of nonstop flights. Or a bullet train. Or maybe Internet technology and virtual reality (whatever happened to virtual reality? I miss virtual reality) will have developed to the point where ordinary families meet via telepresence.

And that's all well within the range of ordinary life uncertainty, no black swans--like a three-hour delay in customs at the border crossing between the two countries into which the former United States has split.
And if you want someone to *guarantee* that you will get there in six hours, it will cost you dearly.
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Re: The illusion of control and predictability

Post by at ease »

...how long did it take you 25 years ago,in 1987 ? just use the past experience to predict, that seems like a reasonable approach... doesn't it ??

...you made me think about a pal of mine, recently he was busy planning a little family trip to celebrate his recent retirement when some test from his routine annual physical changed everything.....so, as you said....the future is a mistery of sorts, kind of hard to predict....i guess all we can do is make a reasonable stab at planning...maybe plan for a worst case senerio and resolve to just make the best of each day, along the way....
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Re: The illusion of control and predictability

Post by GregLee »

nisiprius wrote:Of course what the engineers should have done was to use the subjective ratings as grist, found objective measures that correlated well with the subjective ratings, and then moved on to using those objective measures.
So what is it that makes an instrument reading objective but a person's response non-objective when the doctor asks him to say how much pain he's experiencing on a scale of 1-10? If he says "8", that's a fact, just as an instrument's pointer coming to rest at "8" would be a fact. Don't tell me -- actually, I know the answer. The difference is that instruments don't have souls.
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Re: The illusion of control and predictability

Post by nolabogle »

So what is it that makes an instrument reading objective but a person's response non-objective when the doctor asks him to say how much pain he's experiencing on a scale of 1-10? If he says "8", that's a fact, just as an instrument's pointer coming to rest at "8" would be a fact. Don't tell me -- actually, I know the answer. The difference is that instruments don't have souls.
Further tangent from the thread: from a doctor standpoint - a patient's response is indeed subjective. Whereas an instrument should be objective. An instrument will provide a reliable, reproducible reading if measuring the same variable (i.e. blood sugar level). A patient's response is subjective. It is based on the patient’s feelings, situation, attitude, personality, etc. I ask someone with an injury their pain level and they reply 10 out of 10. I ask someone else with the exact same injury and they reply 1 out of 10 despite having the exact same injury. It is subjective reply that will vary across individuals based on their pain tolerance, situatuion, etc. It is a ‘fact’ that each patient answered as such. But the fact that they answered as such doesn’t make it objective. An instrument should provide the same reading of the recorded measure despite feelings, attitudes, personality, situation, etc (there is no instrument to objectively measure pain). Another non-medical example is asking someone the weather. A person from Maine may subjectively say its warm at 65 degrees. A person from Louisiana may subjectively say its cold at 65 degrees. The instrument (thermometer in this case) is objective and will measure 65 degrees regardless of the persons ‘ subjective interpretation of the measured temperature.
Fallible
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Re: The illusion of control and predictability

Post by Fallible »

hazlitt777 wrote:You ask a good question Nisiprius. In my opinion, we like to control our environment as much as possible. That is great, that is the stuff of progress to some degree. So we try to measure everything, even things that can not be strictly measured. I do believe there has been an excessive mathematicization of investing and economics. It creates the illusion of precision and the illusion that the long term is going to be the same as the last century in investing.

I have nothing against the use of charts and percentages etc. to measure elements involved in investing. I believe their is value in looking at historical returns. But one must never forget the caveats involved and plan accordingly.
Considering the models that failed to be properly used and understood during the '08 crisis (and with LTCM in '98), a most important caveat is human nature. And that's where Kahneman and Tversky (and others) come in, explaining the mental errors we make and why and how we might avoid them. We need to know the numbers AND ourselves.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
Rodc
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Re: The illusion of control and predictability

Post by Rodc »

HueyLD wrote:
ddb wrote:What is the basis for your premise that "we believe we can make precise numerical predictions" for something that will happen in 25 years? I haven't met anybody who believes that.
I think the commonly referred to "4% SWR" comes to mind. I frequently wonder if there is such a thing as a SWR given all the uncertainties in life?
To answer ddb's question: vast numbers of people seem to working very hard to predict the far future to too many significant digits all the time. Slice and dicers trying to figure out precisely how to slice and dice. More humble people trying to figure out if they should use a yearly age in bonds glide path or do it in 5% bumps. People trying to figure out it some SWR is 4.0% or is it really 3.something percent. What precisely should their split between bonds and stocks be. If they choose a withdrawal rate of X% is the chance of going broke going to be 93% or 96%.

This is and has always been rampant on this and other boards.

My take is people just hate uncertainty. If you mention the uncertainty (which I have frequently) a bunch of people will accuse of you of giving up, or putting your head in the sand.

Even Larry not long ago was arguing you just HAD to estimate the unknowable in order to simple set the amount of stocks vs bonds. Poppy cock.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
hazlitt777
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Re: The illusion of control and predictability

Post by hazlitt777 »

Fallible wrote:
hazlitt777 wrote:You ask a good question Nisiprius. In my opinion, we like to control our environment as much as possible. That is great, that is the stuff of progress to some degree. So we try to measure everything, even things that can not be strictly measured. I do believe there has been an excessive mathematicization of investing and economics. It creates the illusion of precision and the illusion that the long term is going to be the same as the last century in investing.

I have nothing against the use of charts and percentages etc. to measure elements involved in investing. I believe their is value in looking at historical returns. But one must never forget the caveats involved and plan accordingly.
Considering the models that failed to be properly used and understood during the '08 crisis (and with LTCM in '98), a most important caveat is human nature. And that's where Kahneman and Tversky (and others) come in, explaining the mental errors we make and why and how we might avoid them. We need to know the numbers AND ourselves.
Definitely, models are improperly used and understood and this is part of the problem. However, I would take it a bit further and argue that the models themselves many times being faulty,mislead us into thinking there is greater predictibility than the matter at hand, investing, truly permits. I would say that many models, because of their "mathematical clothing," cause us to think their is greater predictibility than the subject permits.
Rodc
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Re: The illusion of control and predictability

Post by Rodc »

jb1934 wrote:"Why is it that when it comes to humble stuff, like traveling, we accept the limits of control and predictability, but when it comes to investing and retirement planning, we believe we can make precise numerical predictions? Exactly what is it about my medical expenses for the year 2037 that is any easier to plan than my travel time for Christmas 2037?"

Fear.
Yes
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Boglenaut
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Re: The illusion of control and predictability

Post by Boglenaut »

nisiprius wrote:Question. How long will it take me to travel to Omaha for the family get-together at Christmas in 2037?
It depends on the model of flying car you buy.

Maybe you should spring for one of those new-fangled self-pilotting ones.
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Re: The illusion of control and predictability

Post by plnelson »

nisiprius wrote: Why is it that when it comes to humble stuff, like traveling, we accept the limits of control and predictability, but when it comes to investing and retirement planning, we believe we can make precise numerical predictions? Exactly what is it about my medical expenses for the year 2037 that is any easier to plan than my travel time for Christmas 2037?
Who do you mean by "we"?
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Nestegg_User
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Re: The illusion of control and predictability

Post by Nestegg_User »

Nisi...
Consider the newly graduated engineer that might have assisted with that 1959 paper ....
How well did that individual know how computational power (computers, MathCAD, etc) would change his field , how well his estimates for
financial renumeration would change (60's and very early 70's good, late 70's and early 80's terrible, late 80's until 00 - reasonable), then change of retirement plans from DB to 401k: how well would any of that persons retirement model planning have played out? (no index funds, not even discount brokers -- flat fees of $150 per trade and up instead) So long term, even the basic models have to be challenged as to their functionality/appropriateness when the assumptions that they are based on may change dramatically. His estimates at ten years might not have been far off, then the later 70's with inflation, poor employment conditions for engineers hit and assumptions made for the 25 year period are very much off. Go forward 50 years to those contemplating engineering majors and ......
VennData
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Re: The illusion of control and predictability

Post by VennData »

[quote="nisiprius", one is always reminded of mortality by the experiences of ones' friends and contemporaries. Alas, the suit I bought as an "interview suit" has been to more funerals[/quote]

You should always go to other people's funerals; otherwise, they won't come to yours. - Yogi Berra.

On the trip you should read how only need a few more years are needed to settle the SCV vs TSM debate.
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