Pattern matching beats narrative reasoning

dash2

>For example, “You can’t beat the market, dollar-cost average into index funds!” is the kind of viral story that will earn you nods of approval from millennials and upvotes on Reddit. >Pattern matching, on the other hand, can drive you to make moves like an advanced chess engine. Moves that others find alien and incomprehensible. Sure. Index funds is a viral story which has a lot of rigorous data behind it. As for the advanced chess engine of intuition... ever heard of Fooled By Randomness?

threethirtytwo

> Why does legibility bias persist across society, even when we are aware of it? One answer is: it soothes people. This is false on so many levels. First of all illegibility also soothes. Many people prefer the “illegibility” of natural landscapes in the great outdoors over cold corporate offices with straight lines. Second illegible systems are less predictable and harder to analyze. For example why do we have to build airliners in orderly ways using clean surfaces and simple shapes? Why not messy geometry and chaotic inconsistency? Because the math then becomes to hard to model and predict. Non linear chaotic systems are hard to predict using our quantitative modelling techniques. In fact our modern engineering is built on top of quantitative modeling using applied mathematics and the only things we can really model are ordered and simple systems. Engineering is equivalent to prediction and it is our best form of prediction in the sense that you can get on a metal tube called an airplane and get hurled across the ocean and feel relatively safe because our predictive powers are so high that we know you’re incredibly safe. Order is preferred and it is not bias. It’s because order has intrinsic advantages with analysis. Performance is a different story. It may be the case that chaotic systems can lead to better results but we simply don’t have the tools to predict or understand how these systems work. We are however hitting a new era Of engineering where we use blackbox neural nets to analyze illegible systems. It has downsides in the sense we can never truly fully understand the analysis nor can we fully trust it, but such an analysis is now possible to an extent. It also suffers from the fact that we need massive amounts of trial and error attempts to even get the data that enables building these models.

bensyverson

The narratives described in the article are metanarratives in the critical theory sense. Lyotard defined postmodernism as “incredulity towards metanarratives.” So welcome to 1979! Investors literally can’t stop talking about “pattern recognition,” because it’s comforting to think that the past can predict the future if you’re clever enough. But the best investors are pattern breakers, not matchers.

Jtarii

> For example, “You can’t beat the market, dollar-cost average into index funds!” is the kind of viral story that will earn you nods of approval from millennials and upvotes on Reddit. >Pattern matching, on the other hand, can drive you to make moves like an advanced chess engine. Moves that others find alien and incomprehensible. Wow, this guy has found a way to consistently beat the market, he must be a billionaire at this point surely?

ameliaquining

Doesn't this post consist entirely of the kind of narrative reasoning that it says doesn't work?

majormajor

The headline is often accurate IME... but this whole extension to betting and investment is silly. Noisiest places to look for patterns in the world. Where I think pattern matching is essential is in debugging. Software is the easy one to explain, but problem-solving in life in general, too. An experienced dev who's operated some systems can see odd behavior and be like "ah, feels like a race condition between X and Y" far faster than anyone could construct the narrative of that root cause from first principles. But good luck doing that for a several decades in the financial markets... Maybe you don't go broke, but... there's a a whole lot of dumb strategies that can work better than average for a while, and it's actually pretty hard to do so devastatingly bad that you question your ability if you think you're the pattern-matching investor genius. And the shot at index funds are silly. The beauty of index funds is that they raised the floor and stability for the average middle-income+ person investing for their future vs speculating to try to get a big edge. While bleeding less to overpaid advisors. That's real value, regardless of if some people do better or if you believe that you can consistently do better.

impossiblefork

I think the arguments presented here are really in favour of ensembles of simple stories rather than in favour of pattern matching. I think I could believe that ensembles of simply stories could be powerful. After all, ensembles of decision trees are still a thing.

ghastmaster

I am surprised there was not an affiliate link for a book, "Pattern Matching Investing Guide - Six simple steps to generate generational wealth!" by the author of this post. This post was one of the most strange I have read on the front page. I clicked the link hoping to read some research about pattern matching in some scientific or technical field.

grandpajoey

> Most of my losing bets, in both business and investing, were driven by narrative reasoning: short compelling stories about the world that sound smart. > “Marijuana is about to be legalized in Canada. This is a rare opportunity to invest at the ground floor of a new industry.” > “I’m going to invest in a cobalt mining company because they won a contract with Tesla.” So the author made some bad investments and now looks to "pattern matching" as his next scheme? How about just some basic research and fundamental analysis? Marijuana is a commodity and blackmarket goods that become legal drop in price historically. Doesn't seem like a good investment with 10 seconds of thought put into it. Tesla may have a huge market cap but they have pretty paltry sales, also doesn't seem like a good investment after a moment of reflection.

xrd

This was very strange in an article critical of narratives. I can't help but think this person never played basketball. Eventually making trades started to feel like throwing a basketball. My brain started to develop a deep intuition for technical and fundamental signals, and how they combine to make a “swish”.