Michael Lipper: instinctive investing vs hard science

Ruth and I spent Friday at “The Brain, a TEDx Caltech” event. From 10am to 6pm we were mesmerized by talks given by Caltech Professors, Post Docs, graduate and undergraduate students plus a number of other professors and experts all focusing on the research that they are conducting on the brain.

In a number of cases they described remarkable progress that they are making or expect to make on helping people with various maladies which were previously believed to be behavioral or muscular problems that when attacked through the brain will deliver thrilling results.

As a carpenter who is only given a nail and a hammer and who thus thinks all problems can be attended to by driving a nail, my mind wandered through the presentations as to their applicability to the process and product of investing.

The Chief Investment Officer of Caltech and the incoming chair of the investment committee were also in the audience. I wonder what their takeaways from the day were? I hope to find out at our next meeting on Thursday.

Brain Functions

Trial and Error is the way scientists and others learn. If you will, this is the application of the so-called scientific method to our observations.

When something does not work as expected (error) most scientists move on to do something different (trial). This is not the approach of a number of successful investors.

They focus on why there was the failure and what could they learn from it; for example never again invest in technology or low price/earnings stocks.

But why in this case, in this particular market, did the stock not perform as expected? This ties back to my belief that studying one’s losses is actually more beneficial than studying winners, which is another lesson I learned from handicapping thoroughbred horse races.

A good bit of the research on the brain examines the brain and behaviors of fruit flies and mice.

At first there were thoughts that these small animals with simple understandable brains could easily depict how the human brain works.

What the scientists discovered was while these animals were small they had complex brains.

Though these small brains did not directly provide the medical solutions being sought, they did identify the complexities found within the brain.