First-Rate Intelligence

Confirmation bias is the tendency to search for or interpret information that confirms our beliefs while ignoring or discrediting information that contradicts our beliefs. This creates all sorts of errors in judgement. Jamie Whyte, author of Crimes Against Logic, says “if someone is interested in believing the truth, then she will not take the presentation of contrary evidence and argument as some kind of injury.” This is challenging. It is even more challenging to intentionally seek out those that think differently, but it is what we should do. As Charlie Munger says, “I’m not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I’ve reached that state.” With that in mind...

• If you believe in the efficient market hypothesis you should talk to someone who believes markets are inefficient.
• If you believe in passive investing you should talk to someone who believes in active investing.
• If you believe in investing in gold you should talk to someone who avoids investing in gold.
• If you believe in robo advisors you should talk to someone who doesn’t believe they have a role to play.
• If you believe in serving millennials you should talk to someone who only serves baby boomers.
• If you believe in billing a percentage of assets under management you should talk to someone who charges a flat fee or monthly retainer fee.
• If you believe in fundamental analysis you should talk to someone who believes in technical analysis.

Challenge yourself by challenging your beliefs. For example, Charles Darwin would weigh evidence that contradicted his hypotheses greater than evidence that confirmed them. In the words of F. Scott Fitzgerald, “the test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”

Clarifying the CFP® Certification Experience Rules for an Internship

I graduated from a CFP® Board-Registered Program, Alfred State College (SUNY), in May 2014 and completed a required internship as part of that program. According to the CFP® website under the "Experience Definitions,” "financial planning-related internships completed at a CFP® Board-Registered Program are eligible for credit toward the 3 year Experience requirement at the rate of one month of experience for each college semester credit.” (See the screenshot from the CFP® board website below) The internship I completed was 12 credits as indicated on my transcript, which I submitted to the board to complete the education requirement.

The location of this screenshot can be found at the bottom of the page here.

Despite this, the rules regarding internships are apparently slightly different. 

If you attend a CFP® Board Registered Program and complete an internship as part of this program, understand that despite the one credit equals one month of experience message on the website, you will receive a maximum of three months credit towards CFP® certification.

Note: CFP® Board Registered Program internships do not apply for the 2 year apprenticeship option

Risk Versus Uncertainty Revisited

In The Art of Thinking Clearly the author, Rolf Dobelli, explains the following experiment:

Two boxes. Box A contains one hundred balls: fifty red and fifty black. Box B also holds one hundred balls, but you don’t know how many are red and how many are black. If you reach into one of the boxes without looking and draw out a red ball you win $100. Which box will you choose: A or B? The majority will opt for A.

Let’s play again, using exactly the same boxes. This time, you win $100 if you draw out a black ball. Which will you go for now? Most likely you’ll choose A again. But that’s illogical! In the first round, you assumed that B contained fewer red balls (and more black balls), so, rationally, you would have to opt for B this time around.

Don’t worry; you’re not alone in this error - quite the opposite. This result is known as the Ellsberg Paradox - named after Daniel Ellsberg, a former Harvard psychologist. The Ellsberg Paradox offers empirical proof that we favor known probabilities (box A) over unknown ones (box B).

I have written before about the difference between risk and uncertainty.  Risk is calculable. That is, the odds are known. Uncertainty is not calculable. The odds are unknown. Time and time again in the investment management industry risk and uncertainty are confused for each other, which causes major problems.

Risk and uncertainty are both aspects of two different types of problems, complicated and complex, which also happen to be confused for each other. A complicated problem contains risk. It is like building a rocket ship. A blueprint to building a rocket ship can be replicated because building a rocket ship involves risk: it is calculable. On the other hand, a complex problem contains uncertainty. It is like raising a child. Raising one child the same as another often yields different results because raising a child involves uncertainty: it is not calculable. In the investment world, uncertainty (not calculable) is frequently mistaken for risk (calculable) with disastrous results. 

Dolbelli continues:
The difference between risk and uncertainty also illustrates the difference between life insurance and credit default swaps. A credit default swap is an insurance policy against specific defaults, a particular company’s inability to pay. In the first case (life insurance), we are in the calculable domain of risk; in the second (credit default swap), we are dealing with uncertainty. This confusion contributed to the chaos of the financial crisis in 2008. If you hear phrases such as ‘the risk of hyperinflation is x percent’ or ‘the risk to our equity position is y,’ start worrying.

We do not like uncertainty; however, we live in an uncertain world. One would be well-advised to frequently pause to ask oneself if they are dealing with calculable risk or incalculable uncertainty before making any major decisions.