Thursday, April 4, 2013

Cause Or Effect

It's possible to be doing everything right and still have a bad day. Not every effect you experience is related to something you caused. While it can be comforting on some level to assign a cause & effect judgment the day to day happenings in our lives, it seems to me there are so many variables, so many causes and effects flying around at once, that people can get caught in each other's crossfire or other external events.

There is a great difference between short-term and long-term trends. Over time, the correct causes and effects can be correlated , but the short term is effected by noise. It's kind of like flipping a coin. You know that heads or tails are each likely to come up 50% of the time … after an infinite number of flips. In the short-term though, you won't see 50-50 results.

I grabbed a penny and flipped it 10 times. Here's what happened (where H = Heads; T = Tails)  :

T H H H T H T H H H   
Result: Heads 70% of the time; Tails 30% of the time.

So, is the 50-50 thesis a total failure? Should you have predicted three heads in a row - twice? Fortunately, the penny example is a simplified model that can be easily sanity checked. The odds on each unique toss are indeed 50-50. (For people concerned about physical weighting discrepancies and air currents and such, you could do the test using just numbers a computer model.) Anyway, I hope this is a useful example to see that a completely viable long term strategy might not produce consistent results in the short term.

When you are attempting to do something at all creative or independent, as soon as something doesn't go quite right, it is so tempting to see that as proof of some innate problem with your brilliant plan. Whenever you are trying something new, doubt inevitably follows at the hiccups along the way. And I for one, learn by trial and error, so am quite used to running into problems and trying to fix or optimize a situation when I see something go amiss. I definitely see there is a point though where you are just reacting to noise. Finding that fine line between what feedback is related to your innate plan, and what was just tough luck is up to each individual person. I have found though that our society seems very easily to jump to a simplistic moralizing - ie: misfortune is caused by bad deeds; fortune is caused by good deeds. While this may be the case some of the time, I do not think it is always the case.

From day one, we learn the reward/punishment system. You walk into a wall, it hurts, don't do that. You walk in a straight line, you pick up your toy, you win. It's a decent system, and it works a lot of the time. In some sense though, it is essentially a dependency. A kind of slave mentality. I say a more optimal approach is becoming adept at picking not from two options (bad=punishment vs good=reward), but from four possibilities:

Bad ResultGood Result
Bad StrategyGood Strategy
Short Term 
Long Term
Good StrategyBad Strategy

That is:
  • When you have a bad result, it could be due to either: 
    • a bad strategy OR 
    • despite a good strategy.
  • When you have a good result, it could be due to either: 
    • a good strategy OR 
    • despite a bad strategy.

The top line of the table, we are all familiar with. It was pretty much a staple through childhood & academia, and is ingrained in the very fibers of our nervous system. It is indeed a useful and reliable feedback mechanism, but I'm highlighting the bottom row of this table for this post. When short term results are out of sync with the long term results, it can cause great confusion, and essentially introduces noise into our feedback from the world.

Punishing Good Ideas  :(
A good strategy can appear to produce a bad result. Even though a good strategy badly implemented could produce a bad result, I think it is especially interesting to focus on where both a good strategy AND a good implementation can STILL appear to show a bad result. Take the stock market, for instance. (I actually think there are many cases where thinking about stock market behavior is an interesting model for various aspects of life; it removes a lot of variables, and can help clarify an underlying structure.) If you look at the history of just about any stock (I mainly use Yahoo Finance), you will notice when you zoom out to the max time range, that there are general up or down trends over the course of the years. Some can be quite dramatic. Now, zoom in on a particular month, week, or day. In the middle of some glorious up trend, you can have bad days; maybe really bad days. Similar story for the long-term downward trends.

Figure 1: Short Term Trend
Here are two random stocks (I've never owned either) to show as an example. The first figure shows the two day trend for these stocks (using the adjusted close). If you had bought the blue colored stock (based on whatever research you though was compelling) and then saw this two day decline, should you interpret that as a universal signal to sell? Maybe that two day downward trend was indicative of some underlying problem, an early warning sign … or maybe it was just noise. This is where your judgment, your logic, your gut feeling, whatever it is you use should come in to play when investing resources in your strategy.
Figure 2: Longer Trend

In the particular example, the blue colored stock made a huge comeback over the next several months, while the green colored stock took a tumble. The short term was NOT indicative of the long term. It is a case where something beyond a primal punishment vs reward strategy would be needed to produce optimal results. Of course, timelines are essential to consider when you are labeling something as either a good or bad result ... these particular two stocks have subsequently switched places again. Timing is everything. ;p

In some sense, reacting as if all feedback follows a punishment/reward model can be like kicking someone when they are down. It's interesting to watch the Olympics or other competitions with this in mind. When a sure winner ends up loosing, the shift seems to be almost immediate. As soon as results are announced, commentators, spectators, and competitors alike all seem to switch mindsets immediately as if this outcome was inevitable. Really? Seems like redefining reality in a way that removes the uncomfortable thought that the truly better player did not win. There is something so primal, so final, so comforting about tangible results. After all, they are undeniable. But it would be a tragedy for temporary or random noise to destroy what is a glorious long-term potential.

Certainly, I've experienced many times where I thought I had a good strategy and held my ground only to realize that whatever negative results I kept getting really were the universe trying to tell me something ;p I think balancing boldness and humility is a key to picking the optimal strategy a higher percentage of the time.

Rewards for Bad Behavior
Just as a good idea can have a bad day, it is also possible in the short-term, for a bad idea to be rewarded (or appear to be rewarded). Using stocks as an example again, you could randomly close your eyes and pick a stock from a list and invest in it. You may make a lot of money with that stock over a period of time. But once you realize that you are essentially running blind through a mine field (bad strategy), seems to me the wise course of action is to count your lucky stars and get out of there while you still can. Sometimes what appears to be a reward might have nothing to do with your strategy. By being vigilant and continually checking your strategy, even if you think it is producing good results, you could similarly benefit by realizing that the short term results may not be indicative of the long term. In that way, you could get out early instead of waiting for your actually bad idea to finally produce a bad result.

Stop Loss
One more stock analogy. (What can I say, looking at numbers can be good way to disassociate from an emotional attachment to an outcome to see an underlying pattern.) When a stock is losing too much value, selling that stock is referred to a 'stop loss'. It's painful (you intended all investments to do well), but if you decide the future prospects for return on investment on that stock are not worthwhile, cashing out can be a very wise move. Optimizing your resources is the key, after all. Extending this kind of strategy to other aspects of life: it's the difference between giving up and moving on. 

  • 'Giving up' would be when your gut is telling you the long term prospects are good, but short term downside leads to doubt (and maybe even a social pile on), so you abandon your idea.
  • 'Moving on' would be that your gut is telling you this is a bad long term strategy, so you abandon your idea.

I'm not saying there is an easy way to know if feedback is based on a punishment/reward situation or the effect of short term noise, but I at least wanted to show that some negative feedback may be producing false doubts which are based on an ingrained punishment/reward model without enough consideration for the long term. False doubts can cause independently minded people to throw away a really good idea … and turning good ideas into tangible results is difficult enough. Hope this post encourages more people to give their ideas a fair shake!

by Laura A Knauth

No comments:

Comments Welcome!