Nisbett, Mindware

The order in which you ask questions can make all the difference in the answers you receive. Similarly, I would suggest, though presumably not for the same reasons, the order in which you read books can make a huge difference in your opinion of them. I read Richard E. Nisbett’s Mindware: Tools for Smart Thinking (Farrar, Straus and Giroux, 2015) after reading probably far too many somewhat similar books. As a result, Mindware felt a tad tired.

If, however, this is your first, second, or even third foray into statistical thinking, decision analysis, and/or behavioral economics, you may well find Mindware revelatory. Written for the layman, the book moves along at a good clip and deals with things we care about—or should care about.

Nisbett, a professor of psychology at the University of Michigan, demonstrates the high cost of not constructing proper experiments to test the effectiveness of interventions. “D.A.R.E. programs don’t produce less teen drug or alcohol use, Scared Straight programs result in more crime, not less, and grief counselors may be in the business of increasing grief rather than reducing it.”

He exposes the flaws inherent in multiple regression analysis, using such examples as class size, food supplements, and the long-term unemployed.

He tells stories to advance his arguments. For instance, the one about Eric Schmidt interviewing Barack Obama, shortly after he announced that he was running for president in the fall of 2007, in front of a large audience of Google employees. “As a joke, Schmidt’s first question was, ‘What is the most efficient way to sort a million 32-bit integers?’ Before Schmidt could ask a real question, Obama interrupted: ‘Well, I think the bubble sort would be the wrong way to go,’ a response that was in fact correct. … In the audience that day was a product manager … who made a decision on the spot to go to work for Obama. ‘He had me at bubble sort.’”

Here are a couple of takeaways from the book that may be of particular interest to traders and investors.

First: the detection of real patterns, as opposed to all the patterns we see even when they aren’t there. “The unconscious mind can actually be superior to the conscious mind in learning highly complex patterns. More than that, in fact: it can learn things that the conscious mind can’t. … We know that people can learn them because (1) participants became faster over time at pressing the correct button and (2) when the rules suddenly changed, their performance deteriorated badly. But the conscious mind was not let in on what was happening. Participants didn’t even consciously recognize that there was a pattern, let alone know exactly what it was.”

“Laborious calculation is … not involved in complex pattern detection. … Your nervous system is an exquisitely designed pattern detector. But the process by which it sees patterns is completely opaque to us.”

And second: Popper and poppycock, a personal favorite. Popper, you recall, maintained that induction is unreliable and that hypotheses can only be disconfirmed, not confirmed. Nisbett retorts: “Though correct, Popper’s contention is pragmatically useless. We have to act in the world, and falsification is only a small part of the process of generating knowledge to guide our actions. Science advances mostly via induction from facts that support a theory. … The glittering prizes in science don’t go to the people who falsified someone else’s theory… Rather, the laurels are for scientists who have made predictions based on some novel theory and demonstrated that there are important facts that support the theory and are difficult to explain in the absence of the theory. Scientists [and certain well-known investors/traders] are much more likely to think they accept Popper’s anti-inductive stance than philosophers of science are to endorse it. The ones I know think it’s utterly wrong.”