Thursday, June 2, 2011

You Never Know

The world is full of uncertainties. From little things like the weather to big things like the state of the economy, unpredictable circumstances surround us everywhere we go. Although we can't avoid uncertainties, we can develop an intuition with probabilities that can accompany logic in our quest to make the best possible decisions. We don't give up on logic altogether because it can't work a hundred percent of the time. Rather, we use logic to its limits and rely on our intuition for that shred of uncertainty that will never be completely removed.

An alternative to the preservation of logic for its limited use is the rejection of logical analysis entirely. Some people face the world as a completely chaotic and uncertain jumble, and instead of using their unsatisfactory reasoning skills they invoke the anti-logic or the logical suicide. Some take risky hobbies for ephemeral thrills without thought of the consequences, and others live unhealthy lifestyles giving no credence to medical research. Still others make minor uninformed decisions or buy into speculative investments. All of these people share the common underlying anti-logic: You never know. Although logic is a fine tool in places where it can yield a comprehensive solution, in cases of uncertainty it is completely useless. You can argue for years with all the logical reason the world has to offer, but no amount of solid logic can come close to denting the armor of this solid anti-logic. Whatever models you may construct and whatever statistics you may collect, in the end of the day you can never really know anything.

This most powerful form of anti-logic has presented itself on numerous occasions over the course of my life. I find that the temptation for me to fall prey to this motto is felt strongest when make decisions related to dating and investing. I frequently compare the decision of which girls to date to the decision of which companies to invest in. When I first hear of a girl that would be a potential match for me I usually have the same feeling as when I first discover an interesting company while browsing the Internet. In both of these situations I have absolutely no idea of what may come of these discoveries. Logical reasoning is waiting in the background, and the illogical exuberance races to the foreground. This girl may be the one for me. The share price of that company could triple by next year leaving me financially independent. I come very close to immediately offering a date to this girl, and I must hold myself back from throwing my hard earned money into this random stock. I must wait for some logic to gain control of the decision process.

After taking a deep breath I begin to think logically. I analyze each situation carefully. I peruse through the girls profile and I realize that she is older than me. This alone is not the end of the world, but I continue to realize potential problems. The girl seems judgemental, materialistic, overly spiritual, and demanding. She seems to have all the qualities of someone that I don't socialize with, and she describes her perfect spouse as someone who I clearly cannot relate to. My exuberance subsides and I am ready to disregard the idea in its entirety.

A similar mental path is taken regarding my potential investment opportunities. I start looking at the companies financials. I notice a P/E ratio of 50, a PEG ratio of 3.5, and profit margins of 5%. The company seems to operate in a highly competitive industry, and the company seems completely overpriced. The next company has its own problems. This one has a net loss, a declining share price, heavy competition, and a management that is falling apart. I have lots of money to invest and I am very eager to yield a large return on my investment. However, the logical circuits in my brain conclude that it is probably much wiser for me to save my money for another opportunity.

At this point my brain is teased by the powers of anti-logic. I am about to make a logically informed decision but something very powerful is holding me back. I can never be sure. I know many men who have married older women, and I may be misjudging this girls personality. I can't know for certain unless I go out with her. This may be the perfect girl for me, and I would be passing her up simply because I have some logical hypothesis. I might as well go out because I can never know for certain unless I do. Similarly, regarding my company under scrutiny, I may be passing up the investment of a lifetime. Many companies have gone from rags to riches overnight, and I can't be sure that this is not one of them. The company that seems overpriced may be valued that way for a reason. Its share price may continue going up. And that company that has a declining share price may be just about ready to start turning around. The management can be fixed and the margins can improve. Though all these things are counter intuitive, I can never really know where the stock price will go. After all the logical analysis is complete, I still may be passing up a great company. I might as well just buy a few shares in order not to feel bad when the company actually does succeed.

No matter how solid one's logical reasons are they can fall prey to the "you never really know" anti-logic. Though this feeling may seem compelling, it is very important to withstand its temptations. Once while tutoring a college student in statistics I mentioned about the improbable chances of winning the lottery. I clearly demonstrated that winning the lottery is basically impossible from a probability perspective, and if one is willing to buy a ticket for the one in a million chance of actually winning, the same person should avoid driving a car because of the one in a million chance of it being picked up by a tornado. Though I made the point very clearly, the student was convinced that winning the lottery was still a possibility. Though it may be incredibly improbable, those who created the lottery have tapped into our inner anti-logic. You can only know for certain that you won't win if you don't play the game. But if you have nothing more than a one in a million chance of winning, it may still be worth a shot because in the end of the day, no matter how logical something may sound, you never know.