Sunday, May 20, 2012

When Learning Goes Wrong

The lesson many people take away from this experience is that the President is to blame for hot stoves, or perhaps Wall Street Bankers.

As I noted in an earlier post, there are three ways you can learn - by direct experience, indirect experience, and projected experience.  And if you can, in particular, master these last two techniques, you will do very well in life - no matter what you decide to do - as you will be ahead of the vast majority of humanity, who struggles to comprehend even direct experience.

Yes, it seems that there are a lot of people who cannot even learn after putting their hand directly on a hot stove.  They put their hand on a hot stove and get burned, and instead of thinking, "Gee, that was dumb, I'll never do that again!" they think something else.   Perhaps it is, "Well, if I leave my hand there, maybe I'll build up a tolerance to hot stoves!" which sounds stupid, but G. Gordon Liddy used to do it (and now he hawks gold, so there you go).

Others try to externalize the lesson.  After all, it can't be their fault they put the hand on the hot stove, right?  So someone else must be to blame.   And small children do this all the time, crying and saying, "Mommy, it isn't fair!" and then perhaps kicking the stove.

Why is it that people look to their own malfeasance last instead of first?   An interesting question, and perhaps the example of the child is apt.  Small children are self-centered and selfish - the ultimate expression of the Id.   You've all had to deal with the "terrible two-year-old" whose favorite new word is "NO!" and favorite phrase is, "You're not the boss of me!"   And we've all seen the pathetic parents who try to reason with a toddler and try to explain the world to them, logically instead of teaching them directly with the back of a hand.   But the kid is smarter than the parents - he/she knows that if they scream "NO!" loud enough, they will get a candy bar or some other form of patronization.

And perhaps that is where this new generation of adult toddlers is coming from.   Told their entire lives that nothing is their fault, they are shocked when unemployment hits 10%, no one wants to hire them, and their poorly-thought-out investment plans go South.   So they throw a tantrum and say "Taxed enough already!" or "We are the 99%!" - but they never bother to look inwardly and say, "Maybe it is time to stop putting our hand on the hot stove!"

That is half the problem with learning - people have a bad experience but then draw the wrong conclusions from it - or draw the exact opposite conclusion they should.   As a result, they do the same bad things, over and over again, until their hands are as blackened as G. Gordon Liddy's.   So they lose their money in gold in 1982, and then decide to invest in houses.  They lose their shirt in housing in 1989, and then invest in tech stocks, which they lose out on in 1998.   Then in the 2000's they decide to try houses again.  When that goes horribly wrong, they decide maybe gold again - or maybe tech stocks!

They never learn the simple lesson that trying to time the market and make spectacular returns is little more than gambling.   They never learn that sound investments, diversified and held over time, will far out-perform speculative and risky deals.  They go back to the stove again and again.

Why is this?   Well, the second half of the story is bad data.   As I noted in my learning post, if you see your brother put his hand on the hot stove, and he yells in pain, you might conclude that hot stoves are dangerous.   But suppose your brother - because he is mean (he is your brother, after all) - says, "Hey, that was FUN!  You should try it!"

Or worse, he says to you, "Hey, I DARE YOU to put your hand on the hot stove!  I hear it is a lot of fun!"   And you know, kids do that.   Adults, too.

So, taking advice from someone else, you put your hand on the hot stove, and get burned.   And when you scream "OUCH!" the folks who baited you into doing this just say, "Well, you just didn't do it right!  Other people say it is a lot of fun!"   And if you are particularly dense and tend to trust people too much, you might even believe this.

So, bad data might cause people to make bad decisions, even if they are capable of applying the three kinds of learning.   Or more precisely, poor normative cues are at fault.   The television, the media, people who want to rip you off, they try to twist logic around so it sounds like you are being "smart" to invest in their schemes, or lease cars, or get payday loans.  They use a lot of fancy-sounding words like opportunity cost and get you to think you are using projected learning when you are doing little more than projectile vomiting.

And you see this, clearly, when people try to sell you Facebook Stock, or Gold, or Condos in Fort Lauderdale.   They offer up convoluted explanations as to why an investment "makes sense" when your direct learning experience teaches you otherwise.  When I would point out, to these folks, back in 2005, how the 1989 Real Estate market blew up, they would immediately chime in with, "Well this is a different market than that, because....." and then they would blather on with a lot of platitudes and nonsense that really didn't explain why this Real Estate market was "different" than the one in 1989 - as if Real Estate had changed dramatically in the interim.

(And incidentally, when I was buying houses in 1995, my friends who got "burned" in 1989 told me I was a fool.   The lesson they took away from the 1989 debacle wasn't that they had done anything wrong but rather that stoves were evil and should be avoided at all costs.   A stove can burn your hand - or cook you dinner.   If you burn yourself and then say, "I'll never use a stove again!" that is an idiotic lesson to take away from the experience.   But this is not to say that putting your HAND on the stove is the proper use of it.   The lesson they failed to learn was their own malfeasance.  And the lesson I learned was, when Real Estate is overpriced, get out!   I did well in Real Estate as a result).

The same thing happened in the "dot com" bust of the 1990's.   Back then, young "dot com" entrepreneurs in their designer t-shirts (no hoodies back then) would regale me with how "all the old rules are out the window!  Profits are a thing of the past!"   They tried to tell me that how fast you burned through capital was more important than showing a profit.   And it was all blithering nonsense, of course, but a lot of people bought into it, because it sounded cool and they had no critical thinking skills.

Those who fail to learn from history are doomed to repeat it.   But throughout history, people have used the rallying cry of "Well, this time, it's different!" as the drive their car right off the cliff for the umpteenth time, and then wonder why it all goes so horribly wrong later on.

Wrong Conclusions and Bad Data can take even the best learning experience and twist it all around, so that you learn nothing from it.  And yet, it is not hard to avoid these pitfalls.  First, look to your own actions, rather than actions of others, in applying learning lessons, and decide what it is you could have done to avoid the problem, and then vow never to do that again.   Second, don't fall for convoluted arguments, advertising slogans, poor normative cues, and other bad data in indirect or projected experience scenarios.   And one simple way to do this is to see whether indirect or projected experience scenarios are contradicting direct experience.   If you've been burned on a hot stove, and someone tries to tell you otherwise, well then, that person is lying.

It is a pretty simple test.