Reasonable>rational, Surprise & Room of error

 Reasonable>>>>rational

 There are players, very clever, who often taste losses because they are being rational, always try to have a logical perspective in terms of finance and life. Sometimes you have to be more realistic, more reasonable because every time thing doesn't go as you want, as you have thought logically.

Julius Wagner-Jauregg was a 19^th-century psychiatrist who had two unique skills: one being recognizing patterns and the second being seeing everything in a possibly logical way. He won a noble prize in medicine in 1927 for cure mental disease by inducing a fever. Wagner-Jauregg is one of the only doctors in history who recognized the fever's role in fighting infection and also prescribed it as a treatment.  But that's where the science ends and reality sets in. fever is almost universally seen as bad. And people don't want to induce fever in their bodies for fighting infection. Instead, they want to be treated with drugs like Tylenol to reduce them as quickly as they appear. If you think why then the answer is simple: fever hurts. And people don't want to hurt. That's it. And doctors' goal is not just to cure a disease but also to cure pain within the limit of what's reasonable and tolerable to the patient. 

So it may be rational to want fever for fighting infection but it’s not reasonable. That philosophy—aiming to be reasonable instead of rational—is one more people should consider when making decisions with their money.

Bookish finance teaches you to follow a mathematically adequate investment strategy but the real deal should follow the strategy which lets you sleep at night. Rational investors invest their money based on numerical data without even thinking of going it to the south which could impact him and his family whereas reasonable investors invest their money based on numeric data plus the impact which might cause on to him and his loved ones. What’s often overlooked in finance is that something can be technically true but contextually non-sense.

So the best advice is that always try to evaluate the situation before making a rational or reasonable decision.

Surprise!

History is also called the study of a surprising event. Researchers and investors see it as a guide to the future but the irony is it is not the map of the future. Yes, history can guide us to the future. Several scientists have made their model and theory by studying history and contributed to the world but in investment, it doesn't work that way. Investing is the group of people making decisions with limited information about the things that will have a massive impact on their wellbeing.

Richard Feynman, the great physicist, once said, "Imagine how much harder physics would be if electrons had feelings." Well, investors have feelings so you could imagine how tedious it is to predict based on past information. Therefore economics is the only thing that changes over time and rarely few events repeat.

People tend to have overconfidence in making investments and think they will earn a good percentage of return because they might have experienced some disastrous events. But that doesn’t qualify them to know what will happen next. Hence whatever had happened in the past might not serve as the guide to the future.

Two things happen when you completely rely on investment history as a guide to what is going to happen next. First: you will likely miss the outlier event which can destroy the growing economy. For example the great depression, world war, the dot-com bubble, the housing crash of the mid-2000s.

The second being history can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.

I'm not saying that you are not supposed to look back at history, you just have to take certain general takeaways like people's relationship to greed and fear, how they behaved during crises, and how they respond to incentives tend to stable in time. Certain trends, trades, sectors, specific causal relationships about markets, and what people should do with their money are always an example of evolution in progress. Not of history. 

Importance of room for error.

From error to error, one discovers the entire truth. Error is not a fault of our knowledge but a mistake of our judgment approving that which is not true. From the errors of others, a wise man corrects his own. Las Vegas casinos, a very unlikely place for smart financial folks to be seen but you'd see them there playing blackjack. Some of them practice card counting, which can teach them something extraordinary about managing money: the importance of room for error.

 The fundamental of blackjack is simple which is no one can predict what card the dealer will draw next but by tracking the cards which already have been dealt, you can calculate the probability of cards that remains in the deck. So you can get the odds in your favor but there is a decent chance that you'd be wrong because the dealer knows that what mindset of the player is. That is beat the odds, not certainty. Therefore you must have room for error. The world isn't that kind to anyone, at least not consistently.

Kevin Lewis, a successful card counter portrayed in the book Bringing Down the House, wrote more about this philosophy “Although card counting is statistically proven to work, it does not guarantee you will win every hand—let alone every trip you make to the casino. We must make sure that we have enough money to withstand any swings of bad luck.” But people underestimate the need for room for error. Stock analysts tend to give price targets not price ranges. Economics forecasters predict things with precise figures and the pundit gains followers by providing rock-solid certainties instead of saying "we can't know for sure" and speaks in probabilities. And eventually, it leads to disappointment. The best way to deal with such disappointment is to have room for error. It lets you endure some potential unfortunate outcomes and lets you stick around for a long period until the odds are in your favor. Also, it is important to have the cousin of room for error, “optimism bias” in risk-taking. Idea is that you can be risk-loving still yet completely averse to ruin.