Thursday, November 30, 2017

Simplifying Assumptions

Models are stories that help us think. Countries, money, words, companies, our own identity and anything that 'separates' one thing from another is a model. They aren't reality, but we can't deal with reality. It is way to big for any human that has ever existed's head. Our stories help us pick our mistakes. Ideally consciously. Ideally humbly. A famous financial model called 'The Efficient Market's Hypothesis' assumes all investors only think in terms of return and risk, in the same way, and in a way that can be reduced to numbers. It assumes unlimited borrowing, zero transaction costs and perfect flow of information. Despite all those assumptions being wrong, the model helped build some very useful low-cost investment alternatives. If you try to deal with all problems, and never make simplifying assumptions, it becomes impossible to move forward. My preference is micro-ambitious, trial and error. Try a little. Learn a little. Try again.

Through the noise

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