A Trumpet Fanfare for What Works

October 12, 2021

Just north of Monterey on Highway 101 there is a time warp. The other day I entered it as a 70-year-old in a 2018 Camry, and for a brief moment in time became a 20-year-old in a 1970 Barracuda with a surfboard on top. It didn’t just feel like I was 20, I really was 20.  On describing the sensation to my sister, she immediately knew the spot:  a grove of eucalyptus trees with a sandstone monolith marking the entrance. It is a surreal experience that begins with an inner tympanic pounding that builds to a 2001 Space Odyssey trumpet fanfare as you round the bend and glimpse the magical forest. 

There are two explanations for this sensation. Either I entered a wormhole through space and time, or my memories were so vivid they seemed real. Determining which alternative is right is not easy, because the workings of the universe and of our minds are far more bizarre and surreal than we can imagine. 

Neuroscientists are looking inward for answers and physicists are looking outward and they’re both having their perception of reality blown inside out. Neuroscience tell us that what we perceive to be real is actually our brain’s best guess interpretation of information provided by the senses. However, In The Case Against Reality the authors write “On the other side are quantum physicists, marveling at the strange fact that quantum systems don’t seem to be definite objects localized in space until we come along to observe them.” Contrary to common sense, the experimental evidence suggests that physical objects do not exist independent of an observer. The logical conclusion is totally illogical -- what we observe is our perception of an object that does not exist unless we observe it. 

What’s real and what’s perceived is a question I have grappled with since I first heard it postulated in my freshman philosophy class. And, while my search for answers has exponentially expanded my level of questioning, I still cling to my original simplistic answer, which ironically is a question: “What difference does it make?” My enjoyment of morning walks on the beach does not depend on the accuracy of my mind’s interpretation of what I am seeing and sensing. Likewise, every object that is launched into space uses Newtonian calculations irrespective of the fact that Einstein has unequivocally proven the theoretical laws behind those calculations are based on a wrong perception of gravity.

As an investment advisor, I take a similar pragmatic approach. What difference does it make if an economic theory is wrong if it works? My investment strategy is based on Eugene Fama’s efficient-market theory. It is a very “simple hypothesis,” says Fama. “Prices reflect all available information.” And, since he assumes investors rationally evaluate this information, the prices are right. Therefore, it should be very difficult to beat markets – a conclusion he discovered is very well supported by the data.

His colleague and fellow Nobel laureate at the Chicago Booth School, Richard Thaler, doesn’t disagree with the difficulty of beating markets. He just believes the efficient-market theory “…happens to be wrong.” To which, Fama responds, “Like all theories.” Eventually, even Einstein’s theory will be replaced by a new, more encompassing one. And maybe it will provide us with more useful calculations than Newton’s. In the meantime, Newton’s Laws are useful for practical applications because they work, even though they are wrong. Similarly, whether Fama’s theory is wrong is irrelevant, since there presently isn’t a better model for pricing securities and for developing investment strategies. 

The most likely theory is that the grove of eucalyptus trees along Highway 101 triggered very vivid memories. However, it is possible that I entered a wormhole. To quote Rhett Butler, “Frankly, my dear, I don’t give a damn.” There are many instances when knowing which is the right or wrong answer isn’t as important as knowing what works. And that might be an insight worthy of a small trumpet fanfare.

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