Hagstrom, Investing: The Last Liberal Art, 2d ed.

Robert G. Hagstrom, chief investment strategist and managing director for Legg Mason Investment Counsel and author of eight investment books, found inspiration for this book in Charlie Munger’s notion of a latticework of mental models. This second edition of Investing: The Last Liberal Art (Columbia Business School Publishing, 2013) explores “big ideas” from seven academic disciplines—physics, biology, sociology, psychology, philosophy, literature, and mathematics—to build a latticework that will help us better understand financial markets.

Hagstrom’s latticework of mental models is not, of course, definitive. Each person who is willing to invest the intellectual effort required will come up with his own set of models—a set that will undoubtedly change over time as he incorporates new ideas (some, I would suggest, seemingly minor or peripheral but nonetheless potentially fertile) and shifts others around. Moreover, the application of these models, which involves metaphoric thinking, will vary from person to person.

But Hagstrom provides a good model of what a latticework of mental models could look like as well as a thoroughly enjoyable romp through fields of ideas (admittedly most of them familiar) that might serve the investor well. To name but a few: complex adaptive systems that throw the classic theories of equilibrium into serious question, evolution, the psychology of misjudgment, and Bayesian analysis.

The very nature of Hagstrom’s task implies a level of superficiality. If the investor really wants to know about pragmatism or the wisdom of crowds, he should read James (or, a much tougher nut to crack, Peirce) and Surowiecki. He shouldn’t rely on Hagstrom’s summaries. But by the same token he shouldn’t get bogged down in an unending quest to become a polymath. He is, after all, supposed to be using mental models to invest better, not simply striving to know a lot about a lot.

Charlie Munger makes the process sound easy, but then he’s been at it for a long time and is a voracious reader. “Worldly wisdom,” he said, “is mostly very, very simple. There are a relatively small number of disciplines and a relatively small number of truly big ideas. And it’s a lot of fun to figure out. Even better, the fun never stops. Furthermore, there’s a lot of money in it, as I can testify from my own personal experience.” (p. 11) Despite this advice to Stanford students, he himself was obviously never satisfied populating his mental models with only a few truly big ideas. Otherwise, why would he imagine that “Paradise will be a kind of library”?