The Financial Crisis and Self-Experimentation

They are closely related. I’ve been reading James Stewart’s excellent blow-by-blow of the early days of the crisis. As Nassim Taleb has emphasized, the crisis happened because the people running the financial system didn’t understand how it works. They vastly overrated their understanding — their ability to predict. (As Taleb has also emphasized, they still fail to grasp their ignorance.)

Surely it isn’t just the financial system. Surely we don’t overrate our knowledge just here. Much more likely, we overrate our knowledge about everything. This creates a great opportunity. It goes like this: 1. We overrate our knowledge about a large thing (the financial system). 2. We probably overrate our knowledge about everything. 3. We probably overrate our knowledge about small things. 4. There is more to be learned from studying small things than we realize. 5. Small things can be studied experimentally — an especially effective learning method.
Self-experimentation is an example of studying small things experimentally. These experiments taught me far more than I ever expected. Because I knew less than I thought. (Without realizing this fact.) Here are three examples:

1. Acne. I discovered that my beliefs about the two medicines my dermatologist has prescribed were exactly wrong. The one I thought worked, didn’t work; the one I thought didn’t work, did work.

2. Sleep. My self-experimentation led to new ideas about the control of sleep that no one had thought of. I didn’t know experimentation could do that so often. (I thought that such discoveries were very rare.)

3. Mood. My conclusions about mood are really different than what researchers usually say. I never expected to learn anything so radical.

These examples cover three dimensions. In the acne example, I learned I was completely wrong very quickly — that’s speed of learning. The sleep example is about number of discoveries; the mood example is about the “size” of one discovery.

5 Replies to “The Financial Crisis and Self-Experimentation”

  1. I agree with you that people do overrate their understandings. But I don’t think the financial crisis was brought by people who didn’t understand the financial market. I believe that deregulation is responsible for it. The governing institutions didn’t understand the strategy utilized by bankers and the leverage ratio has gone beyond a safe level. That may be the key reason.

  2. Professor Shiller of Yale, in Irrational Exuberance, talks about a fundamental mistake that investors make (especially retail investors); it’s call magical thinking (essentially wishful thinking). it’s why most retail investors think they can pick individual stocks and compete against professional investors in a zero sum game. this magical thinking apparently is at work in all areas.
    It occurs to me that given the cacophony of information some people unconsciously avoid trying to sift through all of it, and just fall back on what they want to believe, i.e., magical or wishful thinking.

  3. Great points, Seth.

    As Nassim Taleb says, the ‘elephant in the room’ for our economic system is still debt–we are still leveraged too thin–and the ‘elephant in the room’ for our healthcare system, as Michael Pollan also recently said, is nutrition.

    We need debt detox and nutrition rehab: self-experimenting with nutrition would hopefully lead people to discover a bricolage of diet-based preventions and even cures to chronic illness problems. Namely, folks would hopefully stumble upon ‘good bacteria’, would detox from sugar and ‘ditto foods’ (goodbye, metabolic syndrome), and would convert their personal health ‘debt’ (inflammation and disease) into equity with high market value (thriving physiologies).

    Nassim calls for the conversion of debt into equity.

    I call for the parallel move in healthcare.

    We need detox in both spheres.

    Self-experimenting exposes us to positive Black Swan opportunities.

    Cheers,

    Brent

  4. We’ve always had wishful thinking. It doesn’t explain the collapse.

    Certainly some people understood what was going on, but it didn’t matter. What mattered was that it was in no one’s interest to pull the plug. Anybody in a position to have any effect and tried would be replaced instantly by somebody who wouldn’t. In effect, they constructed a machine that could not but proceed to the state it reached. The only way to fix it is to give the machine different operating rules that keep it from getting there again. What individuals understand or want has no effect unless the machine is programmed to respond to them.

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