Rd bk. we are Nature

“Modern fragrances are chemical cocktails cunningly designed to win our attention and ultimately to encourage us to part impulsively with our hard-earned wages. Perfumeries are keenly aware of this and actively encourage their consumers to associate fragrance offerings with a desired lifestyle. A fragrance alone cannot achieve this, so they marry their scent to branding and compelling imagery designed to conjure a visual association which stimulates an emotional response, deploying advertisements which are provocatively suggestive of cherished, perhaps secretly indulgent, desires – the more luxuriant the association, the higher the price of the perfume. It is a winning combination that perhaps reveals we are not masters of our sense of smell but its servants. Today, the global worth of the fragrance industry is said to be in the region of $50 billion, which is not to be sniffed at

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A SIMPLE SOLUTION

William of Ockham, a fourteenth-century Franciscan monk from the village of Ockham, in Surrey, England, developed the principle of parsimony, now called Occam’s razor. For centuries it has been a guiding principle of modern science. It’s axioms—such as, “What can be done with fewer assumptions is done in vain with more,” and, “Entities are not to be multiplied without necessity”—boil down to this: Keep it simple, sweetheart. Occam’s razor shows that, most often, the simplest theory is the best.

This is also the key to successful investing. Yet being a successful investor runs contrary to human nature. We love to make the simple complex and follow the crowd. We allow our love of a story about some stock to inflame our emotions and dictate our decisions—buying and selling based on tips and hunches. We approach each investment decision on a case-by-case basis, with no underlying consistency or strategy. We are optimistically overconfident in our own abilities, prone to hindsight bias, and quite willing to ignore over 80 years of facts that show these things to be so. When making investment decisions, we do everything in the present tense. And, because we time-weight information, we give the most recent events the greatest import. Indeed, behavioral economists call this tendency recency bias, which is the tendency to remember more recent events or observations more clearly, and to overweight recent information and underweight events from the more distant past. We then extrapolate anything that has been working well recently very far out in time, assuming that it will always be so. How else could the majority of investors have concentrated their portfolios in large-cap growth stocks and technology shares right before the technology bubble burst in 2000 and the biggest bear market for the Nasdaq since the 1970s ensued?

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The Chinese use two brush strokes to write the word “crisis.” One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger—but recognize the opportunity.

—John F. Kennedy

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The way we are living, timorous or bold, will have been our life.”

–SEAMUS HEANEY

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