On the Value of Not Knowing; China Update; Legumes reduce Cancer Risk!

From: aditya rana
Date: Sat, May 2, 2015 at 2:13 PM
Subject: On the Value of Not Knowing; China Update; Legumes reduce Cancer Risk!

Hi!,

Ray Dalio, who runs the largest ($169BN) and one of the most successful hedge funds in the world was recently asked what really differentiates him from the rest – his response was “ how I deal with not knowing” (http://edition.cnn.com/videos/tv/2015/04/27/exp-gps-dalio-interview.cnn – the 5 minute clip is worth seeing for his comments on the U.S. and China). This approach has a long historical tradition amongst philosophers, including Confucius ("Real knowledge is to know the extent of one’s ignorance") and Socrates ("I know that I know nothing") amongst others. The issue of dealing with not knowing is fundamental to investing success over the longer term and David Dunning, professor of psychology at Cornell University and a leading expert in studying this fundamental cognitive bias, wrote a fascinating article on the subject titled “We are all Confident Idiots” (http://www.psmag.com/health-and-behavior/confident-idiots-92793). To summarise:

– This cognitive bias – known as the Dunning-Kruger Effect – shows that people do not (or cannot) recognize just how incompetent they are in certain areas of life. We all have a habit of developing overconfidence which overwhelms any evidence of our own ignorance.

-“In many cases, incompetence does not leave people disoriented, perplexed, or cautious. Instead, the incompetent are often blessed with an inappropriate confidence, buoyed by something that feels to them like knowledge.”

-The simple idea of “ being able to differentiate between what you know and what you don’t” is extremely hard to achieve and while we may have a reasonable idea of what we know, we often fail to realise the extent of our ignorance.

-Numerous tests have been conducted by him and others which clearly show that people grossly overestimate their prowess and performance, “whether it’s grammar, emotional intelligence, logical reasoning or financial knowledge. Low performing college students, chess players, bridge players routinely overestimate their performance by a long shot”.

-The late-night show “Jimmy Kimmel Live”! asks people on the street questions about made up subjects. Many of the respondents answer with complete confidence instead of admitting they don’t know. (see clip for one such episode – https://youtu.be/y9xc4jOHca0 ).

-In a recent study people were asked to rate their financial knowledge and then tested on their actual financial literacy. The results were eye-opening.

-“The roughly 800 respondents who said they had filed bankruptcy within the previous two years performed fairly dismally on the test—in the 37th percentile, on average. But they rated their overall financial knowledge more, not less, positively than other respondents did. Twenty three percent of the recently bankrupted respondents gave themselves the highest possible self-rating; among the rest, only 13 percent did so. “

-“Why the self-confidence? Like Jimmy Kimmel’s victims, bankrupted respondents were particularly allergic to saying “I don’t know.” Pointedly, when getting a question wrong, they were 67 percent more likely to endorse a falsehood than their peers were. Thus, with a head full of “knowledge,” they considered their financial literacy to be just fine.”

-It is easy to highlight the idiocy of others while thinking that thinking it doesn’t apply to you. However, this issue applies to all of us and the one basic principle to note about the ignorant mind is “One should not think of it as uninformed. Rather, one should think of it as misinformed”.

-The human species is adept at recognising patterns and creative storytelling, which has usually served us well, but when combined with our inability to detect our ignorance, can sometimes lead to unfortunate or even dangerous consequences.

-This issue starts with our early childhood, and the misbeliefs we harbour then can stay with us for the rest of our lives. Children have a tendency to falsely ascribe a purpose to organisms and events (“why tigers exist”? – “made for being in a zoo”). This purpose-driven reasoning when applied to evolutionary theory obscures the fact that “evolution is a result of random differences and natural selection, not agency or choice”.

-Education is thought to be the natural antidote to ignorance – but often all it does is provide illusory confidence to retain the mistakes we make and tests have shown we often “ import knowledge from appropriate settings into ones where it is inappropriate”.

-In addition to misbeliefs arising from childhood and careless reasoning errors, they can also originate “from the very values and philosophies that define who we are as individuals. Each of us possesses certain foundational beliefs – about the self, ideas about the social order—that essentially cannot be violated: To contradict them would call into question our very self-worth. And any information that we glean from the world is amended, distorted, diminished, or forgotten in order to make sure that these sacrosanct beliefs remain whole and unharmed.”

-“The theory of cultural cognition suggests that people everywhere tend to sort ideologically into cultural worldviews diverging along a couple of axes: They are either individualist (favouring autonomy, freedom, and self-reliance) or communitarian (giving more weight to benefits and costs borne by the entire community); and they are either hierarchist (favouring the distribution of social duties and resources along a fixed ranking of status) or egalitarian (dismissing the very idea of ranking people according to status). Humans process information in a way that not only reflects these organizing principles, but also reinforces them. These ideological anchor points can have a profound and wide-ranging impact on what people believe, and even on what they “know” to be true.”

-“Sacrosanct ideological commitments can also drive us to develop quick, intense opinions on topics we know virtually nothing about—topics that, on their face, have nothing to do with ideology. Every day, however, people rely on the cognitive clutter in their minds—whether it’s an ideological reflex, a misapplied theory, or a cradle-born intuition—to answer technical, political, and social questions they have little or no direct expertise in.”

-How does one try and recognize our ignorance and misbeliefs? “Behavioural scientists often recommend that small groups appoint someone to serve as a devil’s advocate—a person whose job is to question and criticize the group’s logic. While this approach can prolong group discussions, irritate the group, and be uncomfortable, the decisions that groups ultimately reach are usually more accurate and more solidly grounded than they otherwise would be.”

-“For individuals, the trick is to be your own devil’s advocate: to think through how your favoured conclusions might be misguided; to ask yourself how you might be wrong, or how things might turn out differently from what you expect and “considering the opposite.” And lastly: Seek advice. Other people may have their own misbeliefs, but a discussion can often be sufficient to rid a serious person of his or her most egregious misconceptions.”

-“The built-in features of our brains, and the life experiences we accumulate, do in fact fill our heads with immense knowledge; what they do not confer is insight into the dimensions of our ignorance. As such, wisdom may not involve facts and formulas so much as the ability to recognize when a limit has been reached. Stumbling through all our cognitive clutter just to recognize a true “I don’t know” may not constitute failure as much as it does an enviable success, a crucial signpost that shows us we are travelling in the right direction toward the truth.”

-A quote attributed to Benjamin Franklin says “the doorstep to the temple of wisdom is a knowledge of our own ignorance.”

Fascinating article which we should all pay heed to as It is all to common to see ideological beliefs trumping evidence to the contrary. With respect to markets, while forming confident views is important to withstand the volatility of markets and the chatter in the media, it is also important to continuously rethink the views by carefully considering the alternatives, paying devil’s advocate, getting opinions from others and learning from mistakes.

China Update:

-China recently announced a major stimulus by cutting the RRR (reserve ratio requirement) by and unexpected 1.0%, the largest cut since their massive stimulus programme was announced in 2008. This expected to release more than RMB 1 trillion of liquidity into the market and expectations are there are more cuts to come as China offsets the drain on liquidity from declining foreign exchange reserves. In addition the research firm 13 D observes, unconventional stimulus measures are reported to be in the works: like utilising foreign exchange reserves to inject capital into policy banks, and allowing local government bonds (to retire the high costs debt issued by their financing vehicles) to be used as collateral to obtain cheap central bank financing. These measures are expected to be utilised to fund the $7 trillion of infrastructure spending over the next several years to integrate the Beijing, Tianjin and Hebei regions (as announced earlier this week by the MOF) – a signature project of this administration. Meanwhile, the tremendous wealth effect emanating from the rise of the stock market should provide a boost to the economy later in the year.

Earlier this week, Mark Mobius, the Dean of Emerging Markets and Chairman of Templeton Emerging Markets Group, said the following in an interview with CNBC: “[U.S.] earnings will not be as good as people expect simply because they have a lot of headwinds…A rate hike in the U.S. is not going to have that much impact on the rest

of the world because the rest of the world is expanding [its] monetary base…China is number one [destination of emerging markets] because of the variety and choices we have particularly now with the [Shanghai-Hong Kong] connect program…It was only recently we were able to get permission to get into the program. That means a whole new era for us because all of these A-shares are open to us and many of them are very attractively priced.”

Legumes Reduce Cancer Risk:

As I have frequently noted, legumes should form a core part of a healthy diet – in addition to whole grains, vegetables, fruits and nuts. In addition to their amazing nutrient content, they also seem to have cancer risk reducing properties as the study below has indicated:

PRCM: April 23, 2015.

-Adding legumes to your diet may reduce your risk for colorectal cancer, according to a meta-analysis published in Scientific Reports (http://www.nature.com/srep/2015/150305/srep08797/full/srep08797.html). Researchers examined 14 studies encompassing 1,903,459 participants. Those who consumed the most legumes, especially soybeans, had the lowest risk for cancer. Researchers attribute legumes’ many health benefits and protective effects to dietary fiber and protein, high amounts of vitamins B6 and E, and high concentration of isoflavones, which inhibit cancer cell growth.

-Came across this wonderful quote which resonates with my experience relating to developing an appropriate daily routine for good health – “You will never change your life until you change something you do daily. The secret to success is found in your daily routine.” John Maxwell. This could be as simple as adding 5 minutes of meditation or yogic breathing into your daily routine, as well as a 30 minute daily walk and legumes, fruits and vegetables to your diet. As per Yogic tradition, it takes about a month of daily practice to form a habit, an idea which is supported by modern research which shows that it takes “300 instances of positive reinforcement to turn a new habit into an unconscious practice. Which means that by focussing our attention on the new habit for the first three weeks, we have a far better chance of making it a lifelong practice” Darren Hardy.

Here’s to making those small and beneficial changes to your daily routine for good health!

Regards,

Aditya

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