Ideas Diffuse

We are looking at the possibilities for the revolution that may result from understanding some deficiencies in human thinking as described in the book “Thinking, Fast and Slow” by Daniel Kahneman. The basic idea is simple and to some people obvious: If we understand biases, errors, mistakes in human thinking then we should be able to fix or avoid them. Let’s not waste time by getting into the “strange loop” (See Douglass R. Hofstadter’s “I am a Strange Loop”) of whether we are trapped since if human thinking is defective, how can we think our way out of it using our defective thinking? The answer is simply that human thinking is not perfect (nothing is) but it is useful, it works for us in many situations. Besides what else do we have?

I have argued that as human culture evolves, we will incorporate the scientific knowledge about these deficiencies in almost everybody’s minds and thus almost everyone will be able to avoid many or all of the errors and mistakes described by Kahneman. This is how cultural evolution works. New scientific knowledge is discovered. If the new knowledge is sufficiently useful to individual people then it should diffuse to almost everybody in some period of time. New knowledge can also be pushed by our social institutions — schools, churches, corporations, governments, any groups or organizations, as well as by individuals. And to better make a revolution, we should push this new knowledge, since for one thing, it will make propaganda less effective.

Simple. A nice, simple, coherent story. Just the kind of thing System 2 likes and sometimes accepts too quickly. We all know simple explanations can be wrong. There is nothing new about that. But I don’t think this explanation is wrong. Besides I’m going to elaborate this explanation, I’m going to make it less simple. And I am not just relying on my intuition or anyone else’s.

So, let’s look at a specific example. I ended an earlier post with the claim that some day there will be no more stock pickers. This is an example of the above type of argument. Research for more than 50 years has shown that stock pickers cannot consistently beat the stock market averages.

“Although professionals are able to extract a considerable amount of wealth from amateurs, few stock pickers, if any, have the skill to beat the market consistently, year after year. Professional investors, including fund managers, fail a basic test of skill: persistent achievement. The diagnostic for the existence of any skill is the consistency of individual differences in achievement. The logic is simple: if individual differences in any one year are due entirely to luck, the ranking of investors and funds will vary erratically and the year-to-year correlation will be zero. The persistence of individual differences is the measure by which we confirm the existence of skill among golfers, car salespeople, orthodontists, or speedy toll collectors on the turnpike.” — Kahneman p. 214.   

Yet, after 50 years of scientific research showing that trying to pick stocks is a waste of time and money —-

“… Typically at least two out of every three mutual funds underperform the overall market in any given year.” Kahneman p. 215.

—- there are still large numbers of mutual fund managers and individuals who think they have a skill to pick stocks and are still trying to do it. What’s going on here? Doesn’t useful knowledge diffuse? In the above formulation I said “in some period of time”. OK, so there is a fudge factor. Just wait. 50 years isn’t long enough.

This is too simple. It doesn’t really explain anything. Why is 50 years not enough time for the stock picking idea to die out? Kahneman has some relevant comments:

“The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the [financial] industry. Facts which challenge such basic assumptions — and thereby threaten people’s livelihood and self-esteem — are simply not absorbed. The mind does not digest them. …” Kahneman p. 216.

“Finally, the illusion of validity and skill are supported by a powerful professional culture. We know that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers. Given the professional culture of the financial community, it is not surprising that large numbers of individuals in that world believe themselves to be among the chosen few who can do what they believe others cannot.” Kahneman p. 217.

OK, here it is: Facts which challenge basic assumptions are not absorbed.

And the more a new fact is perceived to challenge a person’s livelihood or self-esteem, the more quickly and completely and silently is that fact ignored by individuals and by groups. So the reason stock picking isn’t dead yet is because the idea that stock picking is useless has been prevented from entering the financial community by those in that community. Maybe our cultures are collections of cults. Cults deliberately try to isolate their members from outside influences. They don’t want any new ideas coming in and changing things.

The sea of human ideas is not uniform enough so that any idea can diffuse anywhere. There are partial barriers, compartments enclosed by semi permeable membranes that ideas have to cross. An idea — in order to get into the mind of any individual person and stay there and be used by that person — has to fit in with the ideas that are already there. If a new idea contradicts an idea already there, much mental work will need to be done for it to fit in. So the idea that stock picking is useless will have a very hard time getting accepted into the minds of stock pickers.

Is the idea that useful knowledge will diffuse to almost everybody itself useless? No, because in addition to passive diffusion, there is also active diffusion. Ideas can be pushed deliberately through human communication, education by social institutions, organizations, and individuals.

Ideas don’t exist in isolation. They move around together. So multiple ideas have to be spread together or in some sequence where the earlier ideas prepare the way for later ones. Stock picking may only fade away when our present broader financial systems are changed drastically because of their failures and the great harm they have caused and are causing to our societies. We must help to modify the cults of our present financial systems. We must decrease cultish thinking in general — any systems of ideas that close themselves off from new scientific knowledge. To make a revolution, we will have to push many new ideas at once.

One curious consequence of Kahneman’s book may be a reluctance of people to study and try to understand and use the discoveries about human thinking described in the book because it can be demoralizing to contemplate all the many ways all of us so often get things so completely wrong. Who would want to risk commenting on these mistakes in human thinking and in the process make some of the mistakes being commented upon? I am probably one such person. But we need to try to understand and use this new knowledge. Otherwise, why did Kahneman (and other psychologists) do all this work?