Logic Has Its Limits

January 17, 2021

Taking a personality test is an interesting experience. You find out that you are not alone. There is a whole segment of the population that is just like you. That can be either comforting or disconcerting, depending on your view of yourself. In my case, according to Personality Pathway's Myers Briggs personality test, I am an "introverted thinker" who ponders "the apparent chaos of the world in order to extract from it universal truths and principles that can be counted on." My wife is proof that opposites attract, because she is an "introverted feeler." So, while I am trying to build logical strategies, she is trying to build personal relationships. I want to understand the universe and she wants me to understand her. She trusts feelings and I trust reason. To me, logic and emotions have always been mutually exclusive. What has become disconcerting is that I have found they can also be mutually ineffective.

To even consider that there might be limits to the effectiveness of logic is a heretical thought that is a denial of my DNA. My mom, a Daughter of the American Revolution, always said that I inherited the Adams' nose and the Adams' arrogance. The hawkish beak adds to the air of aloofness. However, the arrogance is not based on an over-inflated ego, but on an unwavering belief that through hard work and perseverance an answer can always be found. So, problems fall into one of two categories: those that have been solved and those that are waiting to be solved. The French mathematician, physicist, and philosopher, Blaise Pascal, must have been in our group of introverted thinkers because he once said, "Reason is the slow and torturous method by which those who do not know the truth discover it."

So, while I gleefully proclaim the dangers of emotional responses to markets, I have to soberly admit that logical responses to markets can be just as ineffective. As Daniel Gross said in a web posting, How to Speak Hedgie, "Anyone who read the best seller The Black Swan knows that random geopolitical, financial and economic events can cause the prices of assets to move in ways that defy history and sophisticated computer models." And, may I add, logic. Gross points out that when markets crash money managers blame their problems on "irrational collective behavior" brought on because "investor fear has overtaken reason..." In other words, our decisions were logical and rational; it was the market that was irrational.

As a Myers Briggs "thinking" husband, I am embarrassed to say there are times when I think my Myers Briggs "feeling" wife acts irrationally. But that is more of a condemnation of my understanding of her than it is an accurate description of her. What appears to be irrational are really factors that I don't see, don't understand, or just don't pay attention to.

As a logical investment advisor, I likewise, understand that what appears to be irrational behavior of markets is caused by factors that I don't see, don't understand, or just don't pay attention to. And as much as I would like to believe it is a problem waiting to be solved, I know that, for all practical purposes, movements of markets are unknowable in advance. In hindsight it is easy to construct logical explanations of market gyrations. However, they are no better than the self-deceptive logical rationalizations I use to justify arguments with my wife.

As illogical as it sounds to me, there are problems that can't be solved. So, I need to relate to them based on universal truths and principles that are known to be effective. For markets, that means diversification and discipline, and for my wife that means back rubs and listening.