Generalization In A Specialized World
Opening your mind to thinking outside the box begins by acknowledging that you are inside a box.
Our experiences shape our ideas, beliefs, and our world view. The narrower our experiences, the smaller the box and the more confined that view remains.
A Deep Generalist Or Broad Specialist
Many people advocate for deep specialization, arguing that it allows for the mastery of a particular field gaining a thorough understanding of its complexities and nuances.
Others champion the idea that a broader view enriched by varied experiences can lead to more informed and adaptable solutions.
There is merit to both views and most valuable when understood as mutually inclusive.
Specialization can indeed lead to a high level of expertise in a specific area, which can be invaluable when dealing with intricate financial concepts, investment strategies, or economic analysis.
The drawback of deep specialization without a broad perspective, however, is the risk of tunnel vision. Deep expertise tends not to cultivate broader thinking. If your toolbox contains only a hammer, then all your problems begin to look like nails.
Financial planning is inherently interconnected with other aspects of life, and a purely mathematical approach will fail to address the full spectrum of a person’s needs and aspirations, wants and apprehensions.
Specialization is easier to understand—keep marching forward on the well-traveled path. If mathematicians are faced with a defined problem with fixed parameters, they continue applying mathematical laws until they arrive at the correct answer. This rules-based thinking is remarkably efficient in linear domains such as math, chess, or golf.
When you add ambiguity and uncertainty, however, stringent rules-based decision-making falters, and broader thinking becomes increasingly important.
Leading up to the 2008 global financial crisis, we had regulators for lots of specialties: banking and capital markets, securities, insurance, consumer rights, mortgages, real estate, etc. But credit lending packaged inside of innovative securities (at the very heart of the crisis) spanned all those domains and there was no regulator for that.
The siloed approach to regulation missed this linkage and was blind to the cascading failure that not only cut deep but across the varied financial disciplines.
Make A Connection
There is a theory in cognitive science called connectionism which has advanced our understanding of the human mind. Connectionist models, inspired by neuroscience, psychology, and computer science, propose that cognitive processes can be explained by interconnected networks of simple processing units, akin to neurons in the brain.
These networks learn and adapt through the adjustment of connections, much like how our brains form and strengthen neural pathways.
Online platforms like Netflix, Amazon, and social media networks use connectionist models to analyze user behavior and preferences to personalize content recommendations. Connectionism is also a fundamental factor in the exploding field of artificial intelligence and deep learning.
Extending the concept of connectionism, mental models are cognitive frameworks used by people to understand and interact with their environment.
A mental model is an explanation of how something works that we can easily carry around in our head.
They are powerful thinking tools. They improve the way we reason about issues, help us solve problems, make decisions, and understand life more fully. Mental models are not about what to think but rather how to think, incorporating the best of specialization with a broad perspective.
For example, supply and demand is a mental model that helps us understand how the economy works. Compound interest is a mental model that helps us understand that investment returns and time both matter. Margin of safety is a mental model that helps us understand that things don’t always work out as planned.
Rote memorization of facts will not lead to genuine understanding. Layering these facts upon a latticework of mental models combined with your experiences, both firsthand and observed, integrates the data with life.
This latticework approach, championed by legendary investor Charlie Munger, involves developing a diverse set of mental models from various fields of study. Munger describes this approach as “worldly wisdom” that helps an individual make better decisions in a wide range of situations (not limited to investing).
Mental Models To Add To Your Toolbox
Here is a sample of mental models from wide-ranging disciplines that can help with our financial life.
Physics: This natural science teaches us that complex adaptive systems are continuously adapting and all such systems, including the stock market, can never reach a state of perfect equilibrium. Even at times of relative calm, the market and market participants are in a permanent state of flux.
Biology: Economies, industries, and individual companies may trudge along without noticeable changes, but invariably change happens. Gradually or sometimes suddenly, the familiar paradigm shifts and quite often collapses.
Sociology: When we realize that all market participants constitute a group, it becomes obvious that understanding group behavior is a precursor to understanding why markets and economies behave as they do. Bubbles and busts are driven more by herd mentality than market fundamentals.
Psychology: Modern portfolio theory is predicated on rational market participants. But in reality, the financial markets witness a daily exchange of fear and greed as people trade based on their emotions.
Literature: Read intelligently. If you find that you can easily grasp the content of what you are reading, you are essentially stockpiling information. When you read something that compels you to pause, reflect, and reread to clarify your understanding, it’s likely that this process is deepening your insight.
Reading history, for example, can teach us where we have been and provide clues to where we might be going. (I discussed learning from market history here.)
Reading intelligently not only makes you smarter, it encourages you to maintain a healthy skepticism, rather than unquestioningly accepting every bit of information at face value.
Don’t Go Through Life With Your Eyes Wide Shut
For many individuals, personal financial planning is bewildering, and investing often turns into a frenzied pursuit of the perfect strategy. Blindly racing down a well-worn path, however, is not always the best solution.
People who constantly survey in all directions for insights will find themselves making more enlightened choices and navigating a path that better aligns with their personal goals.
Whether your perspective is that of a generalist or a specialist, the ultimate goal of attaining wisdom is to change a closed mind into an open one. If you aspire to be a better investor, thinker, and person, cultivate open-mindedness, be inquisitive, show enthusiasm, stay true to your core values, and read intelligently every chance you get.
As always, invest often and wisely. Thank you for reading.
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The content is for informational purposes only. It is not intended to be nor should it be construed as legal, tax, investment, financial, or other advice. It is merely my own random thoughts.