Trees or the Forest?

I've been thinking a lot lately about choices and outcomes. What a weird way to start a blog.

There are two contributors to me thinking about these topics: 1) Nassim Taleb's book I recently finished, Fooled by Randomness, and 2) The Covid-19 pandemic

An overall theme of the book, or essay, as he would call it, is that randomness is much more common than most people would like to believe, particularly "successful" people who rarely contribute their earnings or fame or status to luck, and rather to hard work and natural talent. However, should one of these "successful" people lose their fortunes to say a market collapse, they will almost always dedicate that to luck, insisting their lack of skill had nothing to do with it.

The section of the essay that has stuck with me the most, is the one on Monte Carlo simulations and path dependent scenarios. I'll save you the boring financial mathematics applications (believe me, I don't miss studying the theory and complex formulas behind these applications), but instead I'll provide a real-life example, one that I learned about, and modeled, during my first years as an actuary.

Imagine you're modeling the prices of a stock portfolio for a company's investment division over the course of 30 years. That's a long time, but certainly not unreasonable. There are two scenarios that play out over the 30-year projection that look like this:

Scenario A:

YearValue (millions)0 (today)$10010$35020$70030$1000

Portfolio climbs from $100 to $1000 over 30 years

Scenario B:

YearValue (millions)0 (today)$10010$520$5030$1000

Portfolio climbs from $100 to $1000 over 30 years

If we look at the outcomes, these two scenarios produced the exact same results over 30 years. The portfolio grew from $100 to $1000. Of course scenario B offered a much less comfortable road. And, ignoring the outrageously large climb in scenario B that's only there for illustrative purposes, the company, would likely never have been able to hold on through that time period around year 10. Of course they could have just kept the money in the market, but a company would have lost 95% of its investment. Assuming there are margin calls and fees to pay, shareholders to please, and regulators with which to comply, scenario B would have caused many people to lose their jobs, the company to go bankrupt, and we likely would never have seen the fund sky rocket back up to $1000.

The point here, is that the path which is taken to arrive at an outcome matters. It matters in financial markets, and it matters in life.

I think we can learn a few things from this (maybe forced by me) analogy. First, is that I firmly believe we cripple our decision-making because we only consider the outcomes. If you're torn between a big choice in life, it can commonly play-out like this in your head: You picture a turbulent path to get to the outcome for the option you choose, and you picture a perfectly smooth path on the option you discarded. This is essentially the power of regret or remorse. If I make a tough decision at work, and my choice later ends up being very difficult to execute or implement, I sometimes regret the decision and wish I would have taken the other path. Only that's a dumb reaction. Not only can I not go back and change it so regretting the choice is a waste of time and energy, but the other option that I'm picturing is the perfect path under that option. Sometimes I kick myself for not going for a longer run, but you know what? There's a scenario where I stay out for a longer run, get tired and get hit by a bus when I'm not paying attention. Buyer's remorse happens when someone purchases a house, and then wonders (and often wishes) they would have chosen the other - but they're only picturing living in the other house under the best path possible - not the one where the foundation cracks in 6 months, faucets are leaking, and crime spikes in the neighbourhood. So basically, let's stop picturing alternatives in their most perfect state, and instead accept our decision and realize that it's the right one simply because it's the one we made.

Second - enjoy the path. Of course looking at long-term goals and aiming high to achieve success is important, but the path to get there is really what life is all about. Nobody likes to hear a story of a successful entrepreneur or athlete that just says "I was born, and then I sold my company for $100 million 20 years later", or "I started playing tennis, then won Wimbledon 15 years later". We like to hear about the triumphs, the failures, the dips, the grind, and the process, and we should enjoy experiencing those same things in our own lives as well.

My time in New York is a perfect example. I pictured my move here to be going out, meeting lots of people, checking out new restaurants, museums, sporting events, and Broadway shows. It started on that path, and then Covid hit. I can't really go back to Canada at the moment, and haven't seen family members for probably the longest stretch in my life. Should I regret the move? Absolutely not. This is just one path in a scenario that will eventually craft my future self. There are other paths that didn't happen that would have been much worse. Some were probably better, but this is what we've been dealt, so I'll keep trying to embrace it, and I'm excited to see where it winds to next.

Hopefully Covid will end soon, so I can stop being so philosophical and instead post more blogs about travel and exploring New York, but for now, thanks for reading :)

Mike