The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. – John Maynard Keynes. Source: Wikiquote
As Keynes states we are all in one way or another in the thrall of the economic theories that have come before us. All of us have over time created mental models that help us explain to ourselves the way world works. The challenge for investors is to make note when these models can lead us astray.
Much of what passes for investment thought is poorly camouflaged prediction. And most of those predictions are coming from the mental model of some pundit. Jeff Miller at A Dash of Insight notes that most predictions are “very general and ignore time frame.” He notes that:
Predictions involve modeling. The difference is that for many people the models are poorly specified, based on little information, and cannot be tested…Those who rail against models and the “folly of forecasting” while still making predictions are still doing modeling, but doing it very poorly.
Professional investors need to move beyond their mental models, which may very well be flawed and focus on explicit models. Miller notes that explicit models are testable and have some measure of risk (or variability) attached. Explicit models are testable. Mental models are not. Only by making our models testable can we hope to advance our investment thinking.
Rather than being in the thrall of some dead economist think about making your implicit mental models explicit. Force them to stand up to the rigors of testing. At least at that point you will know whether those voices in your head know what they are talking about.