Tillinghast And System Thinking

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We here at GeoInvesting pride ourselves on being information arbitragers, on using understanding gleaned from research and listening and “turning over rocks” to quote Peter Lynch.  We try to remain agnostic in terms of our position bias (even if we have developed a reputation for shorting thanks to our China research), and one way that we do so is to look at other successful managers to understand their thinking, in an attempt to improve how we process information.  Joel Tillinghast’s new book “Big Money Thinks Small” is a good example of this.

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One of the reasons that Tillinghast’s book is becoming required reading in our firm is because of the exploration of System Thinking.  This concept of having two essentially parallel thought processes comes from Thinking, Fast and Slow by Daniel Kahneman, an Israeli-American behavioural economist and winner of the 2002 Nobel Prize in Economics for his work challenging human rationality in economic decision making.

At the core of Dr. Kahneman’s work is the observation that challenges the core of rational, perfectly efficient markets: humans had to survive and developed a “fast decision” process to avoid being eaten (sometimes called the “lizard brain”) and a slower, more meticulous and rational secondary brain (neocortex) that evolved much later in our history, and this lizard part of our brain is completely reactive and irrational.  If you remember our discussion on Dr. Dan Gilbert’s Ted Talk on Happiness, you probably remember the mention of Daniel Bernoulli’s mathematical modeling of expectation and risk which can be the basis of all choices.  Kahneman’s work derives from a fundamental disagreement with Bernoulli from a psychology point of view: that Bernoulli’s utility theory assumes rational economic decision making and ignores cognitive biases.

Now you might be thinking “ah, leave off the psycho-babble and get back to analyzing 10K’s to find me an opportunity.”  That is your System 1 Lizard Brain working, seeking instant gratification (the reason why social media “likes” are addictive) instead of passionlessly and rationally examining the WHY.  All people have this issue expect for certain members of the autism spectrum.  Some of these individuals (think Rain Man) are simply wired differently and can function in a total Mr. Spock mode constantly, which has its own unique challenges.  The goal for those of us that are “normal” is to be able to recognize when we switch from rational System 2 slow thought to reactionary System 1 and how to overcome the heuristic tendencies that can short circuit our investment decision process.

Recent as yet unreleased work by Dr. John Stolk focusing on meta-cognition in Special Forces Operators can give us some insight into Tillinghast’s mindset that has lead to successful trading for three decades: thinking about thinking is how to lessen bias.  Stolk’s work has lead to some approaches for veterans to overcome their PTSD issues in a way that is directly aligned with how Tillinghast approaches making investments with postmortem and PRE mortem analysis.  Analyzing and recording your rationale for an investment decision, then projecting forward under multiple scenarios and recalculation in that “what if” multiple futures forces a suppression of System 1 thought (although not an elimination due to biases).  Repetition of this forced process switching strengthens the slow thought tendencies, and will lead to more positive outcomes.

Given the upside potential of weakening your lizard brain tendencies, we at Geo would recommend an exercise in metacognition: write out every one of your biases you can think of.  Then write an instance for each where it has caused a negative outcome, whether with an investment or a personal situation.  Third step is to write out potential alternative actions you could have taken and what the likely outcomes could be.  If you were to take a half hour of reflective time with this exercise, the likely outcome is a changed perception that you will carry into future decision making.  A positive outcome as your decision making will be improved, more like what Tillinghast has used to outperform for decades.

Thank you for allowing us to share our insights, and we look forward to your comments and discussion.

Contributed by Joe Templin, Geo Investing


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