L.A.M. on a Number Sequence

Let’s play a game. I will reveal to you a sequence of 3 numbers and your task is to determine the rule of this sequence. To help you come up with your conclusion, you can list your own set of 3 numbers and I will answer with either a yes or a no. Based on my answer, you should be able to gain information to determine the pattern of the sequence.

Got it?

Here goes.

My sequence is………………………………………..

2, 4, 8

Ok, I’ll give you a bit of time to come up with your own sequence. On second thought, as this is a blog and not an interactive medium, let me try to second guess the sequences you have come up with.

I believe most of you would have come up with

3, 6, 12

Or

4, 8, 16

Or

16, 32, 64

Or

5, 10, 20

If you came up with any of the above sets of numbers, you are correct! Your sets of numbers do follow my pattern. So what is the rule?

If you said that the rule is to multiply each preceding number by 2 to get the subsequent number in the sequence, your answer is wrong.

Ok this is rather puzzling. In your mind, you are pretty sure that the pattern follows a X2 rule, where each preceding number is multiplied by 2. You run through the calculations again:

2 X 2 = 4

4 X 2 = 8

There is no mistake. Whatever sequences you have thrown up follow a X2 rule and they have been proven to be correct. You throw up more numbers that follows this X2 rule

20, 40, 80

64, 128, 256

7, 14, 28

All of the above are correct. But if you are going to say that the rule is a X2 rule. You are still wrong.

You think for a long time and are on the verge of giving up. Finally, you throw up some random numbers in frustration.

1, 2, 3

5, 6, 7

2, 4, 6

Your pattern is…………………………………………………. correct. 

Now this is even more confusing. These numbers don’t follow a X2 rule but yet they are correct. Could it be that your original hypothesis that the numbers follow a X2 rule is wrong? You list another set of random numbers, throwing in some other unlikely combinations such as negatives and descending orders

2, 4, -8

Wrong.

5, 4, 3

Wrong.

6, 2,7

Wrong.

It took you a moment to register, but almost instinctively, you have figured out the answer. The rule is a sequence of ascending numbers.

Now on closer reflection, you realize one thing. This game is all about obtaining information and when it comes to information, a positive confirmation that your hypothesis is correct is less valuable than information showing that your hypothesis is wrong. If you had thought of sequences to confirm whether your hypothesis is wrong earlier such as throwing up numbers that do not follow a X2 rule or numbers in descending order, you would have reached the correct conclusion earlier. 

Similarly when faced with questions, we are constantly on the lookout for information that confirms existing beliefs. In a debate, we also find ourselves leaning towards arguments or people who agree with our preconceived opinions. 

However, depending on positive confirmation or surrounding ourselves with yes-men, only serves to give us a confirmation bias. A confirmation bias is a tendency for people to favor information that confirms their beliefs or hypothesis. People display this bias when they gather or remember information selectively or when they interpret it in a biased way. You displayed confirmation bias when you started out the exercise by listing sequences that affirms your existing belief that the numbers follow a X2 rule.

Confirmation biases contribute to overconfidence in personal beliefs and can maintain or strengthen beliefs in the face of contrary evidence. This can lead to poor decisions in an organizational context. It leads to continuing with client or personal relationship that are no longer profitable or healthy or continuing to invest in a stock whose share price is falling.

The most valuable information is information that disproves you. Similarly, the most valuable opinions are the opinions that challenge your beliefs. In order to dispel confirmation bias, we need to be open to contrary evidence and to seek data or evidence that contradicts our existing hypothesis. 

So, the next time you find yourself leaning towards an opinion or information that affirms your existing beliefs; take some time to consider the negative or controversial information. You never know if it could lead to a paradigm shift.

L.A.M.

L.A.M. on What Is The Best Investment

We are in an age where people are obsessed with money. Walk into any banking hall and you will find RMs trying to sell you the latest investment products while scaring you with inflation numbers and how your savings account only earns 0.125% annually.

Turn on the computer and you will have ads about how to improve your returns with FX derivatives or how you can make lots of money while working from home. The country landscape is littered with showrooms, where housing agents are eager to pounce on you to explain how property is the best investment because it can go no other way but up. 

Inundated by such stimuli, it is little wonder why people are obsessed with making their money work for them.

One of the most common questions I get as a banker/economist/investor is, "What is the best investment I can have right now?". Depending on the flavor of the season, the person's risk profile and return requirements, my answer would range from REITs to bonds to commodities or to property linked stocks.

However, identifying the correct segment is only a third of the story. Apart from that, you also need to identify the correct entry and exit strategy/points. 

The truth is that it takes a lot of training, discipline and luck that get all 3 points right and if you get any of the trinity wrong, you will find yourself sitting on a two legged stool, begging for a not so graceful crash.

The world of financial investments, is a cut throat one and though there is money to be made in the market, it carries a lot of risk as well. When you are making money, more often than not someone else is losing money. When you have made a good investment, someone on the other end must have made a bad one. In this zero sum game with a plethora of players, what is the probability that an average individual can consistently out smart, out wit and out buy/sell institutions with access to data before everyone else, or governments with more resources than anyone else or professional traders who have spent more time and effort than anyone else honing their skills at making money?

This brings me to the topic of comparative advantage. Comparative advantage is an economics terms which refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. In very layman terms, it is a fancy way of saying that some people are better at some things than other people.

There are some people, who either by talent, access to information and resources or training will possess a comparative advantage over others in making money from money. While for someone else, their comparative advantage could be in photography, or auditing or whatever skill sets or passion that they possess.

Many times, we are so caught up with the financial capital side of things that we forget about improving yields on human capital. There are many financial instrument out there and the ones you are more likely to have access to, also tend to have low barriers to entry. By No Arbitrage Principle, any possibility of low risk, positive returns are quickly snapped up, leaving behind an equilibrium where no supernormal profits can be made. However, when it comes to human capital, there is only one of you. You are unique, your skill set, your experiences, your talents, your resources and abilities are unique. In terms of barriers to entry, it is extremely high. In terms of supply curve, it is perfectly inelastic. What's left is to increase the market demand for that unique product which is yourself.

                                                            (Picture from Logarchism)

As seen from the curve above, When the supply curve is perfectly inelastic, the only way to increase it's value is to increase the demand for the product. When the demand curve shifts upwards from D1 to D2, the value of the product is increased. Furthermore, as there is a very high barrier to entry (no one can replicate you unless they clone you), the supply curve is likely to remain perfectly inelastic in the long run.

So how do you invest in yourself? Well for starters, identify what is your comparative advantage. What are your strengths, your talents, your passions and your abilities?  How would you go about improving them? Do you need to invest money to attend courses, get a certification, etc? Do you need to invest time to network with the right people or to get more motivated? Finally, are you investing enough in marketing yourself, your talents and your abilities?

The best salesmen, aren't the ones who can market their products well. They are the ones who can market themselves well. When we think of Apple, we think of Steve Jobs but have we really thought about how much time, money and effort, it took for Steve Jobs to improve his presentation skills, to motivate himself and to market himself?

End of the day, everyone of us have a certain comparative advantage and we are not all made out to be traders or investors. If you are good at swimming, why compete with someone else at running? Leave the marathon, join a swimming competition and compete on your own terms. The best investment you can make is on yourself.

L.A.M.


If you liked this, you might also like to read:

L.A.M. on Money
L.A.M. on Popularity and Success