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A friend asked me how I could differentiate my wish from my intuition. She made me think, how there was a thin line when it came to defining what we wish and what we assign a certainty, too; an intuition. The human thinking was based on subjective patterns, which either we understood (intuition), or wished to comprehend.
Intuition was a system, a crude cognitive system, which every one of us needed to live. Coming to think of it, we could not have built indices and portfolio systems, if it was not for the intuition we developed over a decade of what works and what does not.
We pondered on the subject together a bit and debated how wish was connected with interest, an opaque frame. The frame forced us to be judgemental, taking us away from our ability to measure and compare. And, when we could not measure, we were away from intuition, but closer to a wish, overconfident of a desired result.
In their paper on 'Predictably Incoherent Judgments’, Sunstein (Harvard Law), Kahneman (Princeton), Schkade (University of California) and Ritov (Hebrew University of Jerusalem), talk about cognitive biases and how a poor ability to compare makes societal intuition poor.
Even if the moral intuitions and sentiments of individuals could be rationalised, there would be a question about the feasibility of a coherent system that is broadly acceptable across society. Society does not know how to rank. Similar factors can be ranked differently at different times, as the context changed. Moreover, societal intuition was unable to translate social events into dollar points. Incommensurability was a concrete psychological phenomenon. There was no readily available metric by which to make the relevant comparisons.
If we were so poor understanding punitive cases, despite the legal framework and weight of evidence, how could we be so sharp in measuring the weight of evidence while investing? How could we be good in comparing performance, if we just could not do it otherwise? How could we learn from the history of performance, when we did not have systems to assimilate and learn from history? How could we do data interpretation in markets, when human ability to handle complexity was limited?
This brings us to our case of counter-intuition. Counter-intuitiveness was a simplification, at least for the investing and economic needs. It made it easy to measure, as it left little to measure. The three-year losers outperforming the three-year winners was a long-range seasonality that was counter- intuitive and simple. But, then, handling simplicity itself was an undermined technique of investing. Overconfidence makes us believe we could compare and measure, while in reality we are so poor at it. Invariably the overconfident intuitive approach becomes risky.
What did we bring to the table? The Orpheus contribution is to urge investors to drop the overconfident approach and look at counter-intuitive investing. Buying negative worst performing outliers was a valuable conspicuous comparison, which needed lesser measurement. It also slowed down the investing process, dramatically reducing risk, a virtuous investing approach picking up underdogs against all intuition and wishes.
The author is CMT, and founder of Orpheus CAPITALS, a global alternative research firm