Its Philosophy Phriday, and as such, I want to discuss my ignorance. Or rather, my justifiable pride in my willingness to say “I don’t know.”

I use this phrase frequently, for there are a wealth of subjects I know very, very little about.

Sometimes I am asked things I could not possibly know, particularly about the future. Rather than guess, I believe the best approach is to admit the truth, then plan accordingly. The alternative is to do what too many people do: Make predictions, then marry those forecasts. This usually leads to catastrophic results.

Understanding what it is I do not know is a core part of my approach to the world. Its why I focus so much on investor psychology and cognitive issues. I want to understand what I don’t know, and what my brain is essentially lying to me about. I believe this approach is rewarding.

You may be somewhat surprised to learn that this is not standard operating procedure for most people in many fields. Perhaps we might blame this failure to admit ignorance on an excess of testing children, who are taught to regurgitate some answer regardless of whether they know its correct or not — but (heh heh) I do not know the actual cause.

In the world of investing, recognizing what you do not know and therefor should not be betting on is paramount. It is an important trait for an investor/asset manager to own. Too many people assume they are making decisions based on what they know, but oftentimes their decisions are based on what they think they know but really don’t.

I am not trying to be cagey or contrarian for its own sake — although I will admit to a dollop of mischievous joy when I watch a TV news anchor’s face when I respond appropriately to a foolish question:

Q: “Where is the Dow going to be one year from mow?”

A: “I have no idea.”

Q:   ( *Twitch* )

Everyone who answers that question with anything other than ”I don’t know.” is mostly lying. They DO NOT know, and even worse, they are often unaware of their own ignorance (see our prior discussions on Dunning Kruger effect).

Perhaps worst of all, they mislead the viewer into thinking that they, the expert, does know and that you, the home viewer, does not . . . and therefore, you should BUY MY PRODUCT.

That twitch is not why I answer the way I do (tho its a small reward); Rather, it is the proper answer. It is a reflection of accepting a simple reality denied by (IMHO) 4 out of 5 people in my industry.

There are tremendous advantages in recognizing what you do not know. Acknowledging shortcomings in your informational intelligence is a form of situational awareness that prevents you from being blindsided.

There are other benefits as well. It shifts your focus to process over outcome; it assists you in understanding what is the result of skill and what is dumb luck. It prevents you from being fooled by randomness. And as we have learned, repeatable results that are the result of a process are vastly superior to random outcomes.

This is a more valuable trait, a reflection of a more insightful set of perspectives than you might realize. Some branding experts have (more or less) stated that “You have moved into the niche market of Truth ever since the larger firms abandoned it for more lucrative fields.” Alas, no, this is not marketing schtick. It is a simple acknowledgement of reality, which leads to smarter planning and superior outcomes. It might be more challenging to sell to people — it ain’t slick, does not lend itself to glossy brochures, is hard to manifest in a tagline — but it works.

What are you ignorant about?

 

 

Category: Investing, Philosophy, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

59 Responses to “On the Value of Not Knowing”

  1. By product, I refer to book, ETF, newsletter, mutual fund, managed futures, hedge fund, etc.

  2. CJBob says:

    What am I ignorant about? I don’t know.

    There is the stuff you know you don’t know. The problem is the stuff you don’t know that you don’t know.

    • denim says:

      I tend to agree that it is hard to know the boundaries of what one knows. However, system engineers, like those NASA engineers who got astronauts to the moon and back safely on the first try, have a process that helps to define those boundaries. It begins by listing every single functional requirement of the total system. In the case of a mutual fund, one would list every function required to be performed by a human, computer, or other machine as cash flowed into and out of the fund. A daunting task. That is where guys like BR come in. I see them as investment system engineers.

  3. NoKidding says:

    Please consider vis-a-vis climate change.

    ~~~

    BR: Scientific predictions based upon sound theory have no connection to silly economic forecasts, Your comment reveals a climate change myopia and a profound ignorance.

  4. Hallsto says:

    First of all, nice post! I’ve heard our inability to admit our own ignorance to ourselves is an evolved trait. Because our brains are, relatively speaking, very good at seeing the components of a problem and solving it, we are driven to believe even the most random confirmations as absolute.

    While we can handle most complex problems fairly effectively, again relative to other organisms, we still fail woefully in systems with many moving parts, especially those where the observer effect comes into play.

    Do markets even exist without ignorance?

  5. Low Budget Dave says:

    We hardly know anything for certain. We might believe God exists, for example, but do not “know”.

    • mllange says:

      Unless you have had personal experience with the existence of God. You pick up the telephone and call a number for someone across the world. They answer. They answer in a manner that you understand. Do you ‘know’ the other person exists?

      ~~~

      BR: Yes.

      You have experience in the past with real world people who live and walk and answer phones. You can set up experiments and validate that these other people exist. You do not have to take it on faith that they are real, but can verify this for a fact.

      Plus, these other people do not claim you will suffer eternal damnation if you so much as question their existence or challenge the blatherings of their supposed representatives.

      Other than that, God and people answering the phone are exactly the same.

  6. [...] Barry on the willingness to say "I don't know."  (TBP) [...]

  7. cakehydrant says:

    I would say to a large extent, I am ignorant about Women. Or should I say, the more I learn about them, the more I realize I don’t understand.

  8. krice2001 says:

    I recall what a finance professor said to us in grad school. He said the world breaks down to 4 types of people. 1) Those that “Know” but don’t know that they know 2) Those that “Know” and know that they know 3) Those that “Don’t Know” and know that they don’t know and 4) Those that “Don’t Know” but don’t know they don’t know. He suggested that it’s the 4th type you have to watch out for. He provided this wisdom after a vocal class mate had again offered a strong definitive opinion.

    What don’t I know? It feels like that encompasses a whole lot of things – even many of the things I’m supposed to know well. I guess that’s why I’m in management. I try to make sure that the people that actually know what they’re doing work for me. I think there’s a talent in that?

    • The goal is to target #s 2 & 3 !

    • VennData says:

      “…I know that tax cuts fix everything. Markets are always right. And Government just messes things up. Just thought I’d let you know…”

      - #4

      • DeLummox says:

        Tax cuts fix everything…Then why do you have taxes?…To pay for things you can’t afford by yourself…Roads -Schools – Police – Firemen – Sewage – etc..

        Markets are always right.. Then why do we have – Bubbles – Market corrections… Markets are neither right or wrong, good or bad. They reflect at an instant of time what people are willing to pay for a stock, bond, or other financial instrument.

        Government just messes things up – Somethings the do, somethings they don’t, sometimes they do, sometimes they don’t – some times they listen to the other guy and not you.

        For Government we have two major problems.
        1. Elected politicians listen to money, not their constituents. (this can be fixed by checks and balances)
        2. The education system no longer teaches basics and facts, it teaches political correctness. It also teaches memorization, not critical thinking. Free thought is to be stamped out. Please note the increase in Charter schools, private schools and home schooling. All of which the government is trying to stamp out/!

        Forecasting in science can be done, provided it can rely on cause and effect.

  9. lrh says:

    I had a pitching coach explain a focus on process versus outcomes this way:

    “There are four pitches one can throw. A good pitch with a good result. A bad pitch with a bad result. A bad pitch with a good result. And good pitch with a bad result. ”

    The successful pitcher (and pitching coach) works to throw good pitches,” he said. “That’s all he can control.”

  10. cakehydrant says:

    By the way, I love this post. I work in consulting, where it is a sin to admit you don’t know something (hey, consultants are supposed to be the experts, right?). It is a dangerous, slippery slope to go through life thinking you know more than you really do. It’s bad enough to fool other people, but more dangerous to fool yourself.

    • odnalro zeraus says:

      Except that when you fool both other people and yourself and collect a big consulting fee in the process, then fooling becomes profitable and creates wealth!
      So that you can make a fool of yourself and also become rich!
      Of course, after making a fool of others!
      Those others did know that they didn’t know.
      They did think that others knew, but didn’t know that they didn’t.
      That’s why it has become a big business to sell the idea that one knows what one does not know to those fools that don’t know any better.

  11. Bob is still unemployed   says:

    In order to learn, you must first declare your ignorance.

  12. Vitus Capital says:

    “Where is the Dow going to be one year from mow?” said my cat..

    -I- don’t say “I don’t know”. I go in to a long-winded disquisition about Fav. pundits say X, short term Y, Long term Z, plus blah blah.

    Then, I say “I don’t know”.

  13. faulkner says:

    I am ignorant about most everything, but it is in matters of levels and degrees, and this makes all the difference. For example, I know many devices around me use electricity, and I can operate them effectively. At a larger level, I know large whirling machines is generate electricity. At a much lower level, I know electrons are whizzing around inside my many devices, but that knowledge is much fuzzier than my knowledge of how to operate them. And that’s ok because other people know this and are trusted to apply their knowledge in creating the machines and devices. Most of the world works like this whether it’s operating a car, getting food, receiving medical care, or gathering information. This diffusion and differentiation of knowledge as well as labor confers a huge advantage on our species. That is, as long as we know the limits of our knowledge and apply others apply their knowledge conscientiously – whether compelled by market forces, regulations or personal standards. In theory anyway …

    In practice, our deeply narrative organization of knowledge means the first person we are deceiving is ourselves. Our vision system sees only a small spot of the world in focus. In our mind’s eye, we think we see everything just as it is. Such is our imagination, that our ability to foresee the next moment – the coffee will spill – becomes a belief we can see the much larger future. We imagine others are like us and act accordingly with the consequent proliferation of untested assumptions and misinformation.

    Who wouldn’t say that they don’t know in such an environment? Us humans. It feels so much more comfortable than the truth.

  14. [...] Source: On the Value of Not Knowing [...]

  15. jaymaster says:

    I was just thinking about this a couple days ago, when I was reading about cold fusion, of all things.

    I keep an eye on that stuff from time to time, just in case. Apparently, progress is being made. In fact, a few weeks ago, some scientists successfully performed the best public demonstration to date.
    That field got such a bad reputation for years that “real” scientists shied away from it. Most of the early promoters were very fuzzy about the science and the physics behind it, with lots of hand waving and “that’s a secret”. And it attracted some very shady characters.

    But the real breakthroughs started a few years ago when some scientists convinced the larger community that it was best to admit that nobody currently understands what is actually going on, or why it works.

    So just admitting that they don’t know, was in fact a breakthrough in its own way. They’ve even changed the name to Low Energy Nuclear Reaction, because they’re not sure if it is actually fusion.

    But dozens of scientists have replicated it, and they continually ramp up the scale. And now they are getting real funding from real universities and corporations. And most of the early hand waivers and self promoters have shut up. The key to it all was saying “this is what we know, and this is what we don’t know”.

  16. [...] The answer to these questions are here. [...]

  17. Ramstone says:

    The obvious next step is to design your investments based on that proclaimed ignorance; e.g. an infrequently rebalanced portfolio possibly informed by a grain, not a fistful, of information based on historical pricing.

    • A passive global index of 14 asset clases balanced by market weight (not cap weight) and expressed in all ETFs, rebalanced via a software optimizer ?

      Yeah, we got that. Launching January 1 2014

      • mrthinks says:

        I’m definitely interested in this!

      • mle detroit says:

        Can you also do a 13-asset-class index, ex fossil fuels? Harder to sell for a while, but its (hot) day will come.

      • The idea behind this is a truly passive global allocation, low-cost ETF model.

        Once you start giving it flavors — no carbon, shariah, resposbile investing, etc. — its a a different beast altogether.

        Plus, I doubt we could do “ex-Carbon” using ETFs.

      • Joe says:

        Assuming that this is intended to be a seriously widespread and non exclusionary attempt to invest in economic progress worldwide, would you be inclined to turn and go back the other direction? Or is there more to the idea?

        ~~~

        BR: Thats a discussion best saved for another post

  18. billyalex2 says:

    I’m not sure if I’ve ever left a comment on this blog, but I’ve followed it for a few years now. I just want to leave a quick note and say how much I appreciated this post in particular. I find it increasingly difficult to listen to anyone who claims they know what the future holds for the markets, the US, or the global economy.

    It’s astounding to me the level of ignorance that people betray when they prognosticate like that. To claim to know the future of a global economy with 7 billion participants is to claim to know, well, pretty much everything. It’s the height of ignorance. To read this post is refreshing indeed in that context.

    Thank you for your excellent posts, and the wide diversity of opinion and viewpoints you never fail to highlight. It is much appreciated!

  19. [...] It is more noble to admit that you don’t know (Big Picture) [...]

  20. [...] On the value of not knowing.  (Big Picture) [...]

  21. drveen says:

    As you seem to be in a fine mood today Barry, where can we find _Yes_Minister_ doing a version of Donald Rumsfeld’s “known unknowns” riff?

    “You have moved into the niche market of Truth ever since the larger firms abandoned it for more lucrative fields.” — Brilliant. Thanks for that.

    Enjoy hooking up your new anchor.

  22. Getu says:

    Know that you don’t know. Then at least you know that you don’t know! If you don’t even know that you don’t know, then you don’t even know that you don’t know!

  23. [...] Ritholtz has another fine “Philosophy Phriday” piece up today on the value of not knowing. His emphasis is on recognizing what you don’t (and perhaps can’t) know so as to [...]

  24. diogeron says:

    Excellent post. I spent my productive (revenue producing) years conducting presentation skills training for executives, among other things. As a self-described “reformed academic,” I was familiar with much of the research in the field of communication, but my clients were only interested in the practical applicability of that research, if at all. As a result, in the Q&A simulations, invariably somebody would try to bullshit their way through an answer and, to paraphrase Mark Twain, “walked out the door only to meet themselves coming back in.” After a review of the videotape, where it became obvious to all and sundry that this is not a great strategy for enhancing one’s credibility, I used to make everyone in the seminar say, out loud, “I don’t know.” While everyone would chuckle at the “exercise” and my observation that “Western civilization will not collapse if you admit you don’t know something,” usually the point was made, hopefully to be retained. As I used to tell them, your main choices are to admit you don’t know (and say you’ll find out and get back to them if the answer is concrete and appropriate), or try to to BS your way through the answer and hope nobody notices. And if you do that in a public audience, especially now with the Gods of Social Media observing and recording your every move like a North Korean dictator, as they say in Mexico, “Buena suerte, amigo.”

  25. scottinnj says:

    I’n my years with working with a large number of recent college and MBA graduates I have quickly learned a rule which has enabled me to determine which of them are likely to go the furthest in their careers (at whatever organization) and that is ‘they know what they don’t know’. Basically people who are self aware enough to recognize a gap, and have the confidence to then fill the gap (ask their boss or whatever) have a reality-based view of the world, and that puts them ahead of 80% of the people out there. Not to go all ‘get off my lawn’ but any 20-something who thinks they have all the answers, doesnt.

  26. culhnd says:

    We may not know what we don’t know, but our spouses certainly do. Maybe we need split screens with the prognosticator’s significant other mocking them.

  27. Sovavia says:

    Ignorance and greed are our greatest foes: they form the greatest inner battle of them all.

    Ignorance rhymes with arrogance: to differentiate facts from opinion, to distinguish things that changes from those that do not, and to understand how we know what we know. I ain’t there yet.

    Complete and utter ignorance is only seeing ignorance in others and not in ourselves (unconscious incompetence).

    Accusing oneself of ignorance instead of blaming others is a little better (conscious incompetence).

    To stop beating oneself over the head for one’s ignorance is even better (conscious competence).

    As human beings, we are neither knowable, knowledge nor knowers. Our true nature is consciousness and joy.

  28. [...] for a fall and stocks fairly valued at best. So where do we go from here, well if Barry Ritholz doesn’t know, I certainly [...]

  29. [...] And it’s nice to know that somebody out there agrees with me. [...]

  30. [...] RITHOLTZ: Why It Is Important For Asset Managers To Be Able To Admit That They Don’t Always Kn… (The Big Picture) [...]

  31. [...] On the value of not knowing. Barry Ritholtz talks about markets but in many ways this column could just be about everything – weather, sports, life. [...]

  32. Om Says 7 stories to read this weekend
    gigaom.com/2013/08/10/7-stories-to-read-this-weekend-67/

  33. [...] from Knowledge proper, economics is non-paranoiac precisely to the extent that it is okay not to know. This has in the past led to accusations that economics is a form of religion, by analogy with the [...]

  34. [...] –I Don’t Know: Barry Ritholtz looks at the importance of saying “I don’t know.” “Sometimes I am asked things I could not possibly know, particularly about the future. Rather than guess, I believe the best approach is to admit the truth, then plan accordingly. The alternative is to do what too many people do: Make predictions, then marry those forecasts. This usually leads to catastrophic results. Understanding what it is I do not know is a core part of my approach to the world. Its why I focus so much on investor psychology and cognitive issues. I want to understand what I don’t know, and what my brain is essentially lying to me about. I believe this approach is rewarding. You may be somewhat surprised to learn that this is not standard operating procedure for most people in many fields. Perhaps we might blame this failure to admit ignorance on an excess of testing children, who are taught to regurgitate some answer regardless of whether they know its correct or not — but (heh heh) I do not know the actual cause.” [...]

  35. Ned Baker says:

    Barry,

    First, thanks for the great blog! I’ve been reading for years now and I think it’s a bit of a public service that you keep this site. By the way I’m always excited when I catch you on Bloomberg Radio. You do throw them off sometimes with statements like “I don’t know”. I love it.

    I’m a passive indexer so I am happy saying “I don’t know”. But the paradox of the efficient market is that folks like us rely on those who *think they know* to price the market. You could write a treatise on that. Obviously those fools timing the market are adding value…

    Best regards,
    Ned

  36. [...] let me commend a couple short articles written by my friend Barry Ritholtz: “On the Value of Not Knowing” and “10 reasons why economics is an art, not a [...]

  37. [...] knowledge, and recognizing one’s own lackings thereto. Last week, we discussed the Value of Not Knowing; that followed the prior week’s discussion of why I don’t bother guessing a monthly NFP [...]