Retirement Crisis Part II: CryptoKitties

Business and other human endeavors are also systems. They, too, are bound by invisible fabrics of interrelated actions, which often take years to fully play out their effects on each other. Since we are part of that lacework ourselves, it’s doubly hard to see the whole pattern of change. Instead, we tend to focus on snapshots of isolated parts of the system, and wonder why our deepest problems never seem to get solved.

- Peter Senge, The Fifth Discipline

Decentralizing our Framework

You know cryptocurrencies, like Bitcoin, are in full hype mode when Floyd Mayweather is in trouble with the SEC for promoting crypto on Instagram. My take: avoid “currencies” like Potcoin, Trumpcoin, and Putin Coin Classic; and the now favorite video game of crypto fans, CryptoKitties, is probably not that good.

But if the cryptocurrencies and kitties do go bust, I hope that 1) The kitties (if any) are ok, and 2) People remember the concept of a “decentralized system,” a long-standing idea, but one that’s been recently catapulted into popularity by crypto fans.

The point to keep in mind is decentralized systems are more resilient than centralized ones, which are more prone to failure. For example, if some component within a centralized system fails, the whole system can break. Contrast that to a decentralized system, where one problem might bring down an isolated part of the system but not the entire thing.

Why is this idea useful? As investors, it’s hard enough to make objective decisions armed with good data and facts. Our judgments can – and often do - omit important information outside our field of view. An attitude of “decentralizing” our thinking encourages us to identify unconsidered factors that can greatly impact our outcomes.

In Part One of this series, we looked at the failure of academics and non-academics to introduce broad-based “usable” knowledge-tools, resulting in a sizable gap in the systems most investors leverage. I stated, On one side of this gap is ‘avoid credit card debt, make sure you save and invest’ wisdom. On the other side of this gap is ‘Benjamin Graham type’ wisdom. When the gap goes unfilled odds are needlessly tilted against the investor.

The unfilled-gap I refer to is the ambiguity around which factors help investors both identify and stay anchored to a resilient program. For investors, ambiguity acts as a vortex, uprooting our choices, pulling them toward a centralized system more prone to failure. What separates a well-anchored decentralized system from the ambiguity-heavy centralized one is a method for filtering out the ambiguity. As apparent as that may sound, in Core Concept Two I discuss why our nature makes dealing with the obvious so challenging:

This usually-helpful information-simplifying system becomes a burden when our choices and consequences are separated by time. Because reason and logic are ways of assembling thoughts to bridge the gap between a choice today and future consequence, our natural desire to build consistent and affirming investment stories can be dangerous. Nobel Prize-winning psychologist Daniel Kahneman sums up why: “It is the consistency of the information that matters for a good story, not its completeness. Indeed, you will often find that knowing little makes it easier to fit everything you know into a coherent pattern."

Many investors deal with important, generally unfamiliar and complex matters by simply turning ideas over in their minds. But, in that system, at what point do they examine the validity of their reasoning? We should be confident in proportion to what we truly understand. Confidence, without a valid reason, is arrogance, which we all know is a one-way ticket to T-Shirtville.

To better anchor our choices, I suggest investors use five simple frameworks. Why not one good framework? Professor of complex systems and author of The Model Thinker, Scott Page --explains why “many models” are both practical and better. Page writes:

To rely on a single model is hubris, it invites disaster...As powerful as single models can be, a collection of models accomplishes even more. With many models, we avoid the narrowness inherent in each individual model.

Page also states:

We need models to make sense of the fire-hose-like streams of data that cross our computer screens. Thus, it is because we have so much data that this might also be called the age of many models.

Five frameworks might sound like overkill but keep in mind they are meant to act as a comprehensive base. The bottom line is they are more helpful than the status quo “fruitful research” discussed in Part One. An example of bad-status-quo comes from an unhelpful assumption that put in motion decades of other flawed assumptions, including what eventually helped trigger the financial crises; called the theory of the rational economic man, courtesy of traditional finance, or “TF”:

Thanks for the help, nerds!

Back on earth this theory applies to no one. Billionaire Charlie Munger, one of the shrewdest decision makers alive, might qualify as one of the few who come close. Munger’s Wikipedia page states: “In multiple speeches, and in the book Poor Charlie’s Almanack, Munger has introduced the concept of ‘elementary, worldly wisdom’ as it relates to business and finance. Munger's worldly wisdom consists of a set of mental models framed as a latticework to help solve critical business problems.”

From Poor Charlies Almanack:

Being the kind of man he was, (Munger referring to his grandfather) he underspent his income all his life and left his widow in comfortable circumstances.

But that was not all that his prudence enabled. Along the way, in the ‘30’s, my uncle’s tiny bank failed and couldn’t reopen without help. My grandfather saved the bank by exchanging over a third of his good assets for horrible bank assets.

I’ve always remember the event. It reminds me of houseman’s little poem that went

something like this:

The thoughts of others

Were light and fleeting,

Of lovers’ meeting

Or luck or fame.

Mine were of trouble,

And mine were steady,

And I was ready

When trouble came.

You may well say, “Who wants to go through life anticipating trouble?"Well, I did, trained as I was. I’ve gone through a long life anticipating trouble.And here I am now, well along in my 84th year. Like Epictetus I’ve had a favored Life. It didn’t make me unhappy to anticipate trouble all the time and be ready to perform adequately if trouble came. It didn’t hurt me at all. In fact it helped me.

Does that sound like the average person to you? Yet, the rational economic man theory suggests Mr. Munger is no better than average. Poppycock.

When you think about it, most investors problems stem from the assumption that we are pre-equipped to handle complex choices. But complex systems that work are invariably built on simple systems that work.

The five frameworks below are tools to both identify and understand simple systems that must function well.

(I’ll have posts on each on the main points of each frameworks over the next month or so, referencing inspirational-sources when appropriate)