Book Review: Risk Savvy by Gerd Gigerenzer

Gerd Gigerenzer wrote Risk Savvy: How To Make Good Decisions in the spirit of Nate Silver’s The Signal and The Noise, and Innumeracy by John Allen Paulos. These latter books propose a “How To Think” while also proposing that people should be taught to think differently, and stop making epistemological errors.

Distinct from The Signal and The Noise, however, Gigerenzer has a strong respect for the value of intuition, which Silver tends to discount in favor of a “1. Hypothesis, 2. Data, 3. Revised Hypothesis” pure rational approaches.

Gigerenzer dedicates significant pages of his book to the value of intuition over rational approaches, and even authored a book called Gut Feelings.[1] (I haven’t read that, and probably won’t.)

Gigerenzer helpfully suggests that in a complicated world of high uncertainty, the best we can do may be to radically simplify our analysis by using rules of thumb. He’s proposing this in the face of a modern trend to build increasingly complex models for analysis, which may lead us to miss the big picture of uncertain risks.

Also distinct from The Signal and The Noise, I found Risk Savvy mostly tedious. It felt like an extended book version of anecdotes delivered to business school students or physicians or pharmaceutical executive retreats[2], and that’s not a good thing.

Gird covers a wide range of decision-making situations, from health-care to restaurant menus to investments and romance. I read the investments section carefully, intrigued by the promise of one subchapter: “How To Beat a Nobel Prize Portfolio.”

gerd_gigerenzer

His conclusion – use simple rules of thumb and eschew complexity – obviously appeals to me when it comes to investments. His explanation of a “mean-variance portfolio” from Nobel Prize winner Markowitz, and a comparatively better and simple portfolio known as “1/N” is terrible. He explains neither portfolio well, but glosses over what either of these would look like. Up until that point in the book, I had wondered what explained my simultaneous confusion and boredom by Gigerenzer’s book.

After reading his investments section, I realized he’s bad at explaining important but complex topics, while at the same time inundating his audience with dumbed down anecdotes gathered from his lectures to business people who want complex-sounding concepts without real substantive explanations.

Like Malcolm Gladwell, but much less interestingly written.

risk_savvy

Please see related post:

Book Review of The Signal And The Noise by Nate Silver

Book Review of Innumeracy by John Allen Paulos

 

[1] I gather Gut Feelings built on Gigerenzer’s good fortune that Malcolm Gladwell’s drew upon Gerd Gigerenzer’s research on the value of intuition for his popular book Blink. I further gather that Gigerenzer has produced important research in the field, and that I’m reading the popularized version of Gigerenzer’s research.

[2] Gigerenzer frequently cites talks he’s given to these groups throughout the book. The “I was giving a lecture to this group…” doesn’t make for a compelling anecdote.

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Book Review: The Lives of Animals by J.M. Coetzee

I’m breaking a series of self-imposed rules in reviewing The Lives of Animals by J.M. Coetzee, assigned to me by a ‘virtual book club’ I joined.

First, the book has nothing to do – apparently[1] – with money or finance, so has no place on this blog.

Second, obviously, one should never join a book club. The only exception to the ‘never join a book club’ rule is that if your charismatic high school English teacher of twenty-five years ago leads the club, then obviously yes you do need to read and review the book. So you see, I had no choice.

The novel’s conceit is that fiction-writer Elizabeth Costello engages in a series of invited academic lectures and debates about our (humanity’s) ethical treatment of animals.

Costello delivers first emotional, then philosophical, arguments for never eating animals, but also for considering animals as persons worthy of at least as much moral and empathetic consideration as any human.

Taboo debate style

Coetzee/Costello seeks to provoke a strong initial reader response by jumping to our most horrific historical comparison. Costello claims that the treatment of animals – the meat processing industry in particular – resembles in industrial form and morality the horrors of the death camps of the Holocaust.

My same English teacher – with whom I share this book club – introduced us twenty-six years ago to Sylvia Plath’s use of the Holocaust to pervert something as (potentially) banal as a father-daughter relationship.[2] We have to have a strong reaction to the analogy, either in agreement or in opposition, or both.

As educated people, we already know that comparisons to Treblinka and Auschwitz should be forbidden, a taboo reserved for something beyond arguments in favor of mere ‘vegetarianism’ or ‘veganism.’ Interestingly, Coetzee too knows this. He immediately argues against Costello, in the form of an elderly Jewish man who articulates in a letter why such metaphors are both facile and offensive.

With this form of fictional argument and fictional response, Coetzee sets up his novelistic technique. The narrator – Costello’s son – objects to his mother’s zealotry in favor of the moral personhood of animals from page one. Costello makes an argument, and the fictional ‘audience’ responds, often in opposition. In this way Coetzee can remain nimble in his argument. Using the debate format Coetzee presents, then refutes, then strengthens, then objects to, his own arguments in favor of an ethical reorganization of our relationship to non-humans.

pets_or_meat
From Michael Moore’s classic “Roger & Me”

Costello asks us to imagine – as other philosophers have before us – what being an ape, or a dog, or a bat would really be like. Could we think or feel our way into their selves? If we could, would that reorder the way we treat other non-human persons?

Sometimes I read the political news of my city, country, and world and wonder whether a ‘fix’ for our most pressing problems comes down to imagining ourselves in the place of others. I limit that ‘empathy deficit’ diagnosis to human societies. Costello, I gather, would have me expand my empathic prescription into non-human societies as well.

Can I change?

What about the argument in favor of the moral personhood of animals, and therefore against the eating of and experimenting with them?

Costello/Coetzee demand an extreme reprioritization of values, a radical change, for which I’m presently unprepared.

As of now, I can’t change the way I treat animals, or at least the way I relate to the meat industry or leather industry or animal-testing pharma industry. I’m not prepared to embrace Costello’s radical reordering.

I read the novel and found myself somewhat moved in the moment, but then returned to eating meat, wearing leather, and using animal-tested pharmaceuticals as soon as I closed the book. For now, Costello’s arguments remain in the pure thought-experiment realm. Can I imagine caring for non-humans so much that I’d consider their personhood before my own convenience, appetite, and comfort?

Best arguments after the novel

I found the strongest argument in favor of Costello’s worldview not delivered by Costello herself in the course of the novel, but rather in one of the “response essays” included in the book.

Barbara Smuts, a primate anthropologist, describes sharing emotions and mutual understanding with both baboons and her dog. The shared companionship between persons – both Costello and Smuts claim and defend the personhood of animals – precludes killing or animal cruelty. Animal-lovers will recognize Smuts’ description of animal friendships she has had in her life, especially with her dog, Safi. Reading Smuts, I wanted to experience baboon and dog companionship the way she has. If I had, would that be enough to change my behavior and moral relationship toward animals?

One of my favorite essays to highlight our unthinking cruelty and selfishness toward non-humans is David Foster Wallace’s “Consider The Lobster,” from a book of essays with the same name.
Wallace concludes his musing on a Maine lobster festival with an exhortation to consider the pain these creatures actually feel – contrary to our unthinking, greedy, hungry slaughter of them in a pot – while being boiled alive. Chances are, Wallace argues, the lobster experiences extraordinary pain before it dies for our pleasure. Knowing that, can we innocently enjoy a lobster feast?

Again, I read Wallace, I totally appreciate his making me uncomfortable with my unthinking gluttony, and then I return to my lobster feast every summer.

Is this about animals at all?

One of the ways this little novel messes with you (or at least, with me) is the problem of whether this treats mostly of an ethical approach to animals at all.

Or is something else at stake for Coetzee?

The response essay by Marjorie Garber changes the frame of the novel entirely. Garber reminds us that Coetzee’s chosen form – a novel built on a series of academic lectures by a novelist – following lectures that the novelist Coetzee gave in real life at Princeton, creates a kind of game for Coetzee to play hide-and-seek with his own beliefs. How much of Costello’s ideas does he embrace, versus how much does he pursue some other meta-fictional aim?

lives_of_animals

I had not anticipated Garber’s final response-question, on this meta-fictional point. Garber suggests that Coetzee aims at exploring the value of literature in changing our mindsets. If we can read and engage in Costello’s extreme fictional worldview, do we shift our own view in real life?

Is the point of the novel, maybe, to set up an extreme case of radical empathy? Maybe an extreme case that cannot be fulfilled, since we cannot (at least I cannot) really empathize with a bat? Does the thought experiment of this kind of empathy produce results in readers?

I don’t know. I’m looking forward to my virtual book club discussion in a few weeks time.

 

[1] Important note: I don’t really know WHAT this book is about.

[2] You kind of never forget the first time reading Sylvia Plath’s “Daddy.” “I have always been scared of you, With your Luftwaffe, your gobbledygoo. And your neat mustache And your Aryan eye, bright blue. Panzer-man, panzer-man, O You –…There’s a stake in your fat black heart And the villagers never like you…Daddy, Daddy, you bastard, I’m through.” Good times!

 

 

 

 

 

 

Please see related posts

All Bankers Anonymous Book Reviews in One Place!

 

 

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Book Review: Money Mindset by Jacob Gold

In The Money Mindset – Formulating a Wealth Strategy in the 21st Century, Jacob Gold traces the key components for building financial fitness, such as finding the right mindset, understanding risk, asset allocation, and diversification. He introduces the importance of understanding taxes and insurance.

He gets the big picture on taxes, which is that you should pay the minimum allowable, but if you pay a lot in taxes you should feel fortunate because that means you earn a lot. Similarly, he gets the point of insurance, which is solely to transfer risk to another entity.[1]

You could possibly start with this book for a newbie, but it wouldn’t be my first choice by a long shot.

I’m not a fan of a couple of Gold’s approaches.

First, although he says stocks and bonds both make up a portion of many portfolios, he does not guide the reader to know exactly how to come up with an optimal asset allocation. I think there is a correct answer, or at least a fruitful discussion to be had about the right mix between major asset classes.

At one point, presumably through laziness, he introduces an absurd situation, in the course of explaining the advantages of diversification and rebalancing:

“Rebalancing is really a forced way to incorporate the “buy low, sell high” mantra. For example, if you had $100,000 and 70 percent of that money was allocated to stocks, 20 percent to bonds; and 10 percent in cash, it might be that the next year that $100,000 grows to $150,000 but the growth was from the bonds. [Emphasis mine.] Since the bonds appreciated in value, that takes the asset allocation that you had determined based on the risk tolerance questionnaire, and throws the balance of investments out of whack…”

Um, no. Rebalancing is the right idea, but there is no conceivable universe in which your 20 percent allocation to bonds makes your portfolio grow from $100,000 to $150,000 in a year and “the growth was from the bonds.” So that part of the book didn’t appeal to me.

My second problem with the book – and I have found this with the vast majority of personal finance/investing books – is that Gold abdicates responsibility to really teach compound interest. Instead, he returns to the ‘Rule of 72’ (gag, barf) to show how money doubles according to the rule of 72 divided by the annual % return.

Sure, that works, but is entirely too inflexible to use for anything but that simple function. How large will my money grow at 3.5% return per year for 27 years? How large will my money grow at 1.4% per year for 8 years? How large will my money grow at 17.3% per year for 14 years? We need to teach compound interest in a real way, and not depend on the ‘Rule of 72.’ We can do better, people.

money_mindset

 

Please see related posts:

Book Review: The Only Investment Guide You’ll Ever Need by Andrew Tobias

Book Review: Simple Wealth Inevitable Wealth by Nick Murray

Book Review: Stocks For The Long Run by Jeremy Siegel

Compound Interest and Wealth

Compound Interest and Kittens

The Princess and Compound Interest

 

[1] Although I don’t think he properly distinguishes between term and whole life insurance.

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Book Review: A Conspiracy of Paper by David Liss

David Liss’s protagonist Benjamin Weaver is the black-sheep son of a recently murdered Jewish stock-trader in 18th Century London. In A Conspiracy of Paper Weaver tracks his father’s killer in private-eye novel procedural fashion – roughing up small-time street urchins, checking in with his wise but eccentric sidekick, flirting with his beautiful love interest, in turn getting roughed up by tougher criminals, all while seeking clues to solve the mystery.

Adding to the historical interest, we explore Weaver’s world at a moment of financial transformation. The stock market, letters of credit, and bank notes are quickly replacing traditional sources of wealth. Whereas Trollope and Austen describe the 19th Century world of English gentry – with their status built upon inherited real property – Liss describes a scrappier 18th Century Jewish and merchant-trading world built on hustle, fists, securities trading, and street-smarts.

The ones who push for and benefit from this transformation in London are the foreigners and Jews, outsiders to the traditional English wealthy aristocracy.

Weaver describes his first visit to Jonathan’s Coffee House, one of the active stock exchanges, where ‘stock-jobbers’ trade paper and run lotteries. We’re witness to a virtual Tower of Babel:

“Looking about me, I could see why my Christian neighbors were so quick to associate Jews with ‘Change Alley, for there was a superfluity of Israelites in the room – perhaps as many as I had ever seen together outside of Dukes Place. But Jews were hardly dominant in Jonathan’s and by no means the only aliens. Here were Germans, Frenchmen, Dutchmen – and Dutchmen aplenty, I assure you – Italians and Spaniards, Portuguese, and of course, no shortage of North Britons. There were even some Africans milling about, but I believed they were servants, and not upon the ‘Change for business. The room was a cacophony of different languages, all being shouted at once. It was a dizzying array of papers changing hands, of pens signing, of envelope-stuffing, of coffee-pouring, and of coffee-drinking. I thought it the very center of the universe itself, and I admired in no small degree any man who could conduct business in a place of such distraction.”

 

Chaotic markets

Participants in these exchanges use manipulation, rumors, inside-trading and false-stock issuances to gain an edge over rivals and the markets. Like many participants in a stock market today or then, Weaver has very partial information. His clients are not who they seem. Multiple competing interests hide facts and motives from him. He’s quick, but the whole scheme of his father’s death remains elusive.

David_Liss_Inscription

Anti-Semitism

Jews may be important in this 18th Century world, but casual and pervasive anti-Semitism rules society. Weaver suffers continuous insults from the English gentry with whom he interacts, but still manages to assert his will. Prior to becoming a private eye, he had built his street-tough reputation as a successful boxer, the ‘Lion of Judah.’ His tough-guy exterior as well as a thick-skinned confidence serve him well under the constant onslaught of prejudice.

Market fraud

The imminent collapse of the South Sea Company menaces Weaver’s world. His father’s death clearly stems, in part, from a conspiracy to hide the shaky and likely fraudulent dealings of the South Sea Company. The Bank of England – then a private company – competes with the South Sea Company and resists its entrance into dealing in government debt. When Weaver receives assistance from a prominent member of the Bank of England in his investigation, is it because that member seeks to undermine the South Sea Company?

To read present-day internet comments on the financial news (Important advice: Never read internet comments on anything) many still resist the move from physical assets to unsubstantial paper or ‘notional’ stores of value.

Television news on certain stations runs constant advertising on the seeming substantiality of gold over paper money or insubstantial stock and bonds. This paranoia extends to the mysterious money creation and restriction of the Federal Reserve. Whenever a financial crash occurs a portion of observers will throw up their hands and retreat from markets, while another portion spots a conspiracy somewhere in the shadows.

Reading A Conspiracy of Paper we think: Perhaps not much has changed since 18th Century London.

I recently met author David Liss, a fellow San Antonio-transplant who lived for a time in my Manhattan neighborhood. When I heard he’d written a historical financial thriller, I knew I had a to read and review it. Two more David Liss novels featuring Benjamin Weaver await me, The Devil’s Company and A Spectacle of Corruption.

Others clearly enjoyed A Conspiracy of Paper as much as I did, as it won the Edgar Award for “best first novel” in 2001. My daughter enjoyed Liss’ latest book, the sci-fi novel Randoms.

Please see All other Bankers-Anonymous Book Reviews in one place!

Please see other book reviews of finance-oriented novels:

The Way We Live Now by Anthony Trollope

Capital, by John Lanchester

And other review of books for kids by a San Antonio-based author:

Going Going by Naomi Shihab Nye

The Turtle of Oman by Naomi Shihab Nye

 

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Book Review: Where Are The Customers’ Yachts by Fred Schwed

Sometimes I procrastinate reading something really important to the point that I want to kick myself. Over the years I’ve seen Where Are The Customer’s Yachts? By Fred Schwed listed on numerous ‘Best Of’ lists of financial books, but only now got around to it in 2016? Ugh, no excuse for me.

But don’t think of this as a financial book.

This is one of the best pieces of comedic writing I’ve ever read. Seriously.

Schwed’s voice at points reminds me of A.A.Milne, in that he begins with a banal-sounding truism, and then veers off – in the second part of his sentence – into an unexpected absurdity, unveiling a deeper truth. It’s not unlike my favorite faux-philosopher Jack Handey’s style, except Schwed’s actually somewhat useful, rather than just plain bonkers.

I say useful because we all need clever ways to defend ourselves against myths of Wall Street and its fawning handlers within the Financial Infotainment Industrial Complex. Schwed satirically punctures our deeply-held myths in a totally goofy way.

He published this in 1940, following his experience on Wall Street in the 1920s and 1930s, but you know what? Yes, you do know what. Plus ca change plus c’est la meme chose.[1]

The title, if you didn’t know, refers to an apocryphal story of a newbie visiting lower Manhattan who is shown all the bankers’ and brokers’ impressive yachts. Long before #FeelTheBern and Occupy Wall Street, Schwed’s retelling of the joke tapped into our suspicions about the inflated compensation of the financial industry.

 

So, read this for the hilarity, but understand that the sly truths slipped in there might just help us as well.

On market predictions

Schwed nails the point that Wall Street’s and the Financial Infotainment Industrial Complex’s predictions aren’t worth more than a printed almanac describing the weather over the next 365 days.[2]

I received a link from a friend genuinely concerned about this headline in the beginning of 2016: “Sell Everything! 2016 Will Be a Cataclysmic year, warns RBS”. It’s hard to explain just how useless these types of predictions really are, unless you’ve been inside the beast and can see these prophesies for what they are. Schwed has some hilarious stuff on this topic.

On Short-Selling

Back in the midst of the 2008 crisis short-selling became unpatriotic and in some limited cases (like naked-shorts) illegal. Popular aversion to short-selling clearly has a long history, as Schwed describes the early 20th Century views and blows up the mythology there as well.

On Options Trading

Schwed describes, tongue firmly in cheek, the possible mechanisms and joys of options trading. Helpfully, he follows that up with a few explanations of how puts and calls and straddles work, although mostly he describes the funny patter of options traders attempting to attract customers. If you’ve ever dealt with options traders (I have!) its pretty funny, and true.

We read useful other thoughts, couched in humorous self-deprecation. The author directly addresses why Schwed – by 1940 a former stock-broker and dabbler in stocks himself – isn’t wealthier.

In his own words:

“…[M]y tendency has been to buy stocks, all a-tremble as I do so. Then when they show a profit I sell them, exultantly. (But never within six months, of course. I’m no anarchist.) It seems to me at these moments that I have achieved life’s loveliest guerdon[3] – making some money without doing any work. Then a long time later it turns out that I should have just bought them, and thereafter I should have just sat on them like a fat, stupid peasant. A peasant, however, who is rich beyond his limited dreams of avarice.”

See, that’s what I’ve been trying to say all along.

That, and also, read his book.
customers'_yachts

Please see related posts:

All Bankers Anonymous Book Reviews In One Place

Never Sell! From Disney to Churchill

Mutual Funds v ETF

Talking One’s Book – Mistrust ‘The Experts’

 

[1] Important note: I have no idea what that means. As my close personal friend Steve Martin says, the French have a different word for practically everything.

[2] Every year a favorite restaurant-owner in my neighborhood hands out an annual paper calendar printed with exactly that: The upcoming weather for the next year, throughout the various regions of the United States. Every time I tear off the page of a new month, I take the time to read that months’ weather. For some reason the subtle humor of the The Liberty Bar calendar never gets old for me.

[3] I learned a word today!

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Book Review: Behavioral Investment Counseling by Nick Murray

Murray is the author of one of my favorite investing books of all time, Simple Wealth Inevitable Wealth, and I’m reviewing this later book partly as an excuse to call attention to his earlier book, SWIW.

But Behavioral Investment Counseling by Nick Murray stands on its own quite well.

The book’s bedrock idea – captured right there in the title – is that investor behavior determines an individual’s wealth prospects, rather than “markets.”

Now this strikes me as 100%, Capital T, True, although an uncomfortable truth for many.

Ask me “how are the markets doing?“ and the right answer – as I’m certain Murray would agree – is “Doesn’t matter, how’s your behavior doing?”

Since Murray’s audience for this book is not individual investors but rather investment advisors, the logical lesson is that advisors need to focus on the beliefs and behaviors of their clients, rather than spend much time on asset or manager selection.

I’ve never wanted to be an investment advisor, but the way Murray describes the “behavior investment counselor” makes the profession seem especially noble.

I dig his voice. He’s a wise and slightly weary zen master who has seen all of the investment behavior mistakes possible, and can describe them to you before you even make them.

behavioral_investment_counselingOn many an important point he acknowledges the unknowability or unprovability of his point. Nevertheless, not doing what he says – not intuiting the essential wisdom – leads to grievous error. You’re welcome to persist in your own stubborn views, he seems to say, and best of luck to you.

I’m not as old as Murray but I find myself adopting that same attitude at times. I mean, people enjoy their investment fantasies. Who am I to disillusion them?

In my own words, the message of the book is

  1. The entire value of an investment advisor is captured in the making of a plan taking into account the client’s specific situation – and then the occasional behavioral counseling at key moments (mostly when the market crashes, but also possibly when it is on a tear upwards and there’s a need to rebalance back to the original plan.)
  2. Readers of SWIW will not be surprised to learn that the best plans will rely heavily on diversified equities (rather than fixed income) as this is the only way to grow one’s money, and avoid the most important risks – loss of purchasing power and outliving one’s money.

For actual investment advisors, Murray’s book offers what seems to me a tremendous amount of self-evident wisdom about what an advisor does, how an advisor should go about building a practice, and how an advisor should first ‘pitch’ prospective clients.

If you haven’t read any Nick Murray yet, do yourself a favor…

Please see related reviews:

Simple Wealth Inevitable Wealth by Nick Murray

The Game of Numbers by Nick Murray

 

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