Reading about Adaptive Systems, Biology & Power Laws may improve your investing

In an astutely written article titled ‘The Expert Generalist – Why the Future Belongs to Polymaths‘, Zat Rana made a case for how the well-read and multi-disciplined generalist will outperform master specialists in an evolving world that is increasingly run by machines and artificial narrow intelligence.

Rana emphasised that some of history’s greatest contributors like Aristotle and Da Vinci were polymaths, and their unique ability of being able to see things differently than others and make connections that others could not gave them an advantage in producing new perspectives and breakthroughs.

Could that be said as well for the field of investing?

In ‘More Than You Know‘, author Michael Mauboussin, a former investment strategist at Credit Suisse and Legg Mason Capital and an adjunct professor at Columbia Business School thinks so. He makes the case for the ‘Financial Polymath’ and explores a diverse range of topics in it.

more than you know

Topics covered stretch from the nature of scientific inquiry to laws of probability, the life cycle of Drosophila (common fruit fly) to Vox Populi and Complexity Theories.

The book is segmented into four portions: (i) Investment Philosophy, (ii) Psychology of Investing, (iii) Innovation & Competitive Strategy and (iv) Science & Complexity Theory.

In each of these portions, random topics from a wide range of fields are covered, with each of them leaving a potential insight for the reader to think through. Despite covering a variety of disciplines and their respective discoveries, the author refrains from bombarding the reader with technical jargon or from going too in-depth in explanation.

Mauboussin wrote the book for financial types, and constantly brings the reader back to understand how a certain concept or understanding could be applied to the financial markets or the discipline of investing.

One example is the author’s commentary on Fitness Landscapes, and it is found in the third portion.

Mauboussin talks about the origins of fitness landscapes and how evolutionary biologists originally developed them to aid in the understanding of how a species increases its fitness. He wrote:

What does a fitness landscape look like? Envision a large grid, with each point representing a different strategy that a species (or a company) can pursue. Further imagine that the height of each point depicts fitness. Peaks represent high fitness, and valleys represent low fitness. From a company’s perspective, fitness equals value-creation potential. Each company operates in a landscape full of high-return peaks and value-destructive valleys. The topology of the landscape depends on the industy characteristics.

He goes on to explain how the metaphor of fitness landscapes can be used to map out the environment of how corporations compete with one another:

fitness landscapes.JPG

There are three broad types of landscapes: stable, coarse, and roiling.

Utilities could be in the first kind, health care and financial services could be operating int the coarse zone, whereas software services and the genomics industry are operating in roiling landscapes. Their business strategy, management approaches, and innovation styles naturally differ and have to ‘fit’ their landscapes.

This is a generalisation and a simple heuristic, and if true, the methods to analyse these industries have to also make sense in their respective contexts:

tools.JPG

The point being that the more dynamic the fitness landscape, the greater the necessary rate of adaptation in order for a corporation to survive…

Adopting a multi-disciplinary approach and seeking out insights from other seemingly-different fields and applying them appropriately could pay dividends in the long-term. Successful investors are said to have a broad base of knowledge, hundreds of mental models, and are able to leverage on all of that.

This was already emphasised by Charlie Munger, who said:

In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero.

What’s even more useful about the book lies in its reference section, where the reader can refer to the research material used by the author for his or her own further study (there’s an entire section there). Readers like myself who are interested in something more technical can rely on the references.

This is one of the best books I’ve read in my life, and suffice to say, I’ll be re-reading it many times over in the future.

Rating: 5/5


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