Discover more from The Scipionic Circle
The Scipionic Circle 90: Effective Learning, Decision-Making, and The Logic of Financial Decisions
"Don't fear failure. — Not failure, but low aim, is the crime. In great attempts it is glorious even to fail." — Bruce Lee
Welcome to another issue of The Scipionic Circle — I hope you find something of value.
In addition to this newsletter, I spend hours meticulously forging summaries for every great book I read to ensure I glean every nugget of wisdom concealed within their pages. If you would like access to these 'Compendiums' as I call them, please consider supporting this publication.
Food for Thought
I. Resulting: Decoding the Complexity of Decision-Making and Outcomes
"Imagine you quit your job to take a position at a new company. The job turns out great! You love your coworkers, feel fulfilled in your position, and within a year you get a promotion. Was it a good decision to quit your job and take the new position? Imagine you quit your job to take a position at a new company. The new job turns out to be a disaster. You are miserable at the company and within a year you have been laid off. Was it a good decision to quit your job and take the new position? I'm guessing your gut told you that in the first case the decision to quit your job was good and in the second case the decision was bad. Doesn’t it feel like if the job works out great it must have been a great decision to quit your old job? And if it doesn’t work out, it must have been a bad decision? The thing is, in neither case did I give you any meaningful information about the process used to arrive at the decision. I gave you only two pieces of information: (1) a bare-bones (and identical) description of what went into the decision and (2) how the decision turned out. Even though you don’t have any detail about the decision process, when I tell you how things turned out, it feels like you really know something about whether the decision was good or bad. And this feeling that the result of the decision tells you something significant about the quality of the decision process is so powerful that even when the description of the decision is identical (you quit your job and take a new position), your view of that decision changes as the quality of the result changes.
"You can spot this phenomenon across all sorts of domains. You buy a stock. It quadruples in price. It feels like a great decision. You buy a stock. It goes to zero. It feels like a terrible decision. You spend six months trying to land a new client/customer. They become your biggest account. It feels like a great use of your time and a great decision. You spend that same six months trying to land the client and you never close the deal. It feels like a waste of time and a terrible decision. You buy a house. When you sell in five years you get 50% more than you paid for it. Great decision! You buy a house. When you sell in five years the house is underwater. Terrible decision! You start doing CrossFit and after the first two months you have lost weight and gained muscle mass. Great decision! But if you dislocate your shoulder within the first two days, it feels like a terrible decision. In every domain, the outcome tail is wagging the decision dog. There’s a name for this: Resulting. When people result, they look at whether the result was good or bad to figure out if the decision was good or bad. (Psychologists call this 'outcome bias,' but I prefer the more intuitive term 'resulting.') We take this resulting shortcut because we can’t clearly 'see' whether the decision was good or bad, especially after the fact, but we can clearly see if the outcome was good or bad. Resulting is a way to simplify complex assessments of decision quality. The problem? Simple isn’t always better. Decision quality and outcome quality are, of course, correlated. But not perfectly, at least not in most decisions we make, and certainly not when we have only one try at the decision. The relationship between the two can take a long time to play out." — From How to Decide: Simple Tools for Making Better Choices by Annie Duke.
II. The Testing Effect: Harnessing the Power of Retrieval Practice for Effective Learning
"Since as far back as 1885, psychologists have been plotting 'forgetting curves' that illustrate just how fast our cranberries slip off the string. In very short order we lose something like 70 percent of what we’ve just heard or read. After that, forgetting begins to slow, and the last 30 percent or so falls away more slowly, but the lesson is clear: a central challenge to improving the way we learn is finding a way to interrupt the process of forgetting. The power of retrieval as a learning tool is known among psychologists as the testing effect. In its most common form, testing is used to measure learning and assign grades in school, but we’ve long known that the act of retrieving knowledge from memory has the effect of making that knowledge easier to call up again in the future. In his essay on memory, Aristotle wrote: 'exercise in repeatedly recalling a thing strengthens the memory.'
"Francis Bacon wrote about this phenomenon, as did the psychologist William James. Today, we know from empirical research that practicing retrieval makes learning stick far better than reexposure to the original material does. This is the testing effect, also known as the retrieval-practice effect. To be most effective, retrieval must be repeated again and again, in spaced out sessions so that the recall, rather than becoming a mindless recitation, requires some cognitive effort. Repeated recall appears to help memory consolidate into a cohesive representation in the brain and to strengthen and multiply the neural routes by which the knowledge can later be retrieved. In recent decades, studies have confirmed what Mike Ebersold and every seasoned quarterback, jet pilot, and teenaged texter knows from experience—that repeated retrieval can so embed knowledge and skills that they become reflexive: the brain acts before the mind has time to think. Yet despite what research and personal experience tell us about the power of testing as a learning tool, teachers and students in traditional educational settings rarely use it as such, and the technique remains little understood or utilized by teachers or students as a learning tool in traditional educational settings. Far from it." — From Make It Stick: The Science of Successful Learning by Peter C. Brown, Henry L. Roediger III, and Mark A. McDaniel.
III. The Underlying Logic of Financial Decisions: Unraveling the Stories We Tell Ourselves
"Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.
"Those people can be misinformed. They can have incomplete information. They can be bad at math. They can be persuaded by rotten marketing. They can have no idea what they’re doing. They can misjudge the consequences of their actions. Oh, can they ever.
"But every financial decision a person makes, makes sense to them in that moment and checks the boxes they need to check. They tell themselves a story about what they’re doing and why they’re doing it, and that story has been shaped by their own unique experiences.
Take a simple example: lottery tickets.
"Americans spend more on them than movies, video games, music, sporting events, and books combined.
"And who buys them? Mostly poor people.
"The lowest-income households in the U.S. on average spend $412 a year on lotto tickets, four times the amount of those in the highest income groups. Forty percent of Americans cannot come up with $400 in an emergency. Which is to say: Those buying $400 in lottery tickets are by and large the same people who say they couldn’t come up with $400 in an emergency. They are blowing their safety nets on something with a one-in-millions chance of hitting it big.
"That seems crazy to me. It probably seems crazy to you, too. But I’m not in the lowest income group. You’re likely not, either. So it’s hard for many of us to intuitively grasp the subconscious reasoning of low-income lottery ticket buyers.
"But strain a little, and you can imagine it going something like this:
"We live paycheck-to-paycheck and saving seems out of reach. Our prospects for much higher wages seem out of reach. We can’t afford nice vacations, new cars, health insurance, or homes in safe neighborhoods. We can’t put our kids through college without crippling debt. Much of the stuff you people who read finance books either have now, or have a good chance of getting, we don’t. Buying a lottery ticket is the only time in our lives we can hold a tangible dream of getting the good stuff that you already have and take for granted. We are paying for a dream, and you may not understand that because you are already living a dream. That’s why we buy more tickets than you do.
"You don’t have to agree with this reasoning. Buying lotto tickets when you’re broke is still a bad idea. But I can kind of understand why lotto ticket sales persist.
"And that idea—'What you’re doing seems crazy but I kind of understand why you’re doing it.'—uncovers the root of many of our financial decisions.
"Few people make financial decisions purely with a spreadsheet. They make them at the dinner table, or in a company meeting. Places where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together into a narrative that works for you." — From The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel.
Quotes to Ponder
I. Bruce Lee on failure being a stepping stone to greatness:
"Don't fear failure. — Not failure, but low aim, is the crime. In great attempts it is glorious even to fail."
II. Hermann Hesse on finding strength in surrender:
"Some of us think holding on makes us strong but sometimes it is letting go."
Did you enjoy this email? Please consider buying me a coffee to caffeinate my reading sessions.
Thank you for reading,