Saturday Serendipity
Quote, Mental Model, Interesting find.
Hello.
Reading time: About 7 minutes
Quote
“I find that all you have to do to get ahead in life is to be non idiotic and live a long time. It's harder to be non idiotic than most people think.” - Charlie Munger
Mental Model
The Map is not the territory
This is a mental model from the discipline of general semantics. I have already written about this before, but I believe I can do a better job in writing about this idea.
This is a picture of the world map. Now of course when we see the map we know that the picture does not actually show the real size of the country. But looking at this map we do make observations which might not be true. If I see Greenland here I might argue that it is bigger than USA. But in reality it is 20% of USA.
Korzybski wrote,
A.) A map may have a structure similar or dissimilar to the structure of the territory.
B.) Two similar structures have similar ‘logical’ characteristics. Thus, if in a correct map, Dresden is given as between Paris and Warsaw, a similar relation is found in the actual territory.
C.) A map is not the actual territory.
D.) An ideal map would contain the map of the map, the map of the map of the map, etc., endlessly…We may call this characteristic self-reflexiveness.
Basically ‘maps’ can be considered as the anything. These things are nothing but abstractions. That’s the most important thing to understand. Our understanding of the map is an abstraction.
“Even the best and most useful maps suffer from limitations, and Korzybski gives us a few to explore: (A.) The map could be incorrect without us realizing it; (B.) The map is, by necessity, a reduction of the actual thing, a process in which you lose certain important information; and (C.) A map needs interpretation, a process that can cause major errors. (The only way to solve the last would be an endless chain of maps of maps, which he called self-reflexiveness.)” - Farnam Street
This image is very fascinating. Imagine that you are seeing a tube light in your room. Now your first inference will probably be how big the tube light is and how bright the light is. You have missed out on a lot of things about the tube light. You missed out on the wiring which is seeping out, the brand name which is slightly written behind, etc.
Basically all the information that is out there our inference of it is not the entire one. The ‘map is not the territory’. We see things but we generally don’t fully notice or understand them.
We also use a lot of different maps for different things which don’t necessarily apply in different circumstances.
In Business
Here is a very good example from Farnam Street,
By most accounts, Ron Johnson was one the most successful and desirable retail executives by the summer of 2011. Not only was he handpicked by Steve Jobs to build the Apple Stores, a venture which had itself come under major scrutiny – one retort printed in Bloomberg magazine: “I give them two years before they’re turning out the lights on a very painful and expensive mistake” – but he had been credited with playing a major role in turning Target from a K-Mart look-alike into the trendy-but-cheap Tar-zhey by the late 1990s and early 2000s.
Johnson’s success at Apple was not immediate, but it was undeniable. By 2011, Apple stores were by far the most productive in the world on a per-square-foot basis and had become the envy of the retail world. Their sales figures left Tiffany’s in the dust. The gleaming glass cube on Fifth Avenue became a more popular tourist attraction than the Statue of Liberty. It was a lollapalooza, something beyond ordinary success. And Johnson had led the charge.
With that success, in 2011, Johnson was hired by Bill Ackman, Steven Roth, and other luminaries of the financial world to turn around the dowdy old department store chain JC Penney. The situation of the department store was dour: Between 1992 and 2011, the retail market share held by department stores had declined from 57% to 31%.
Their core position was a no-brainer, though. JC Penney had immensely valuable real estate, anchoring malls across the country. Johnson argued that their physical mall position was valuable if for no other reason than that people often parked next to them and walked through them to get to the center of the mall. Foot traffic was a given. Because of contracts signed in the ’50s, ’60s, and ’70s, the heyday of the mall building era, rent was also cheap, another major competitive advantage. And unlike some struggling retailers, JC Penney made (some) money. There was cash in the register to help fund a transformation.
The idea was to take the best ideas from his experience at Apple: great customer service, consistent pricing with no markdowns and markups, immaculate displays, and world-class products, and apply them to the department store.
Johnson planned to turn the stores into little malls-within-malls. He went as far as comparing the ever-rotating stores-within-a-store to Apple’s “apps.” Such a model would keep the store constantly fresh, and avoid the creeping staleness of retail.
Johnson pitched his idea to shareholders in a series of trendy New York City meetings reminiscent of Steve Jobs’ annual “But wait, there’s more!” product launches at Apple. He was persuasive: JC Penney’s stock price went from $26 in the summer of 2011 to $42 in early 2012 on the strength of the pitch.
The idea failed almost immediately. His new pricing model (eliminating discounting) was a flop. The coupon hunters rebelled. Much of his new product was deemed too trendy. His new store model was wildly expensive for a middling department store chain – including operating losses purposefully endured, he’d spent several billion dollars trying to effect the physical transformation of the stores. JC Penney customers had no idea what was going on, and by 2013, Johnson was sacked. The stock price sank into the single digits, where it remains two years later.
What went wrong in the quest to build America’s Favorite Store? It turned out that Johnson was using a map of Tulsa to navigate Tuscaloosa. Apple’s products, customers, and history had far too little in common with JC Penney’s. Apple had a rabid, young, affluent fan-base before they built stores; JC Penney’s was not associated with youth or affluence. Apple had shiny products, and needed a shiny store; JC Penney was known for its affordable sweaters. Apple had never relied on discounting in the first place; JC Penney was taking away discounts given prior, triggering massive deprival super-reaction.
It is very similar in sport, we see a lot of times that many people try and run everything back and want to see the next Sachin or the next Kohli and in doing so they train them like Sachin and Kohli trained and try and emulate their techniques but they fail.
Why?
Because that particular technique suited that person’s abilities. This is why I find sport to be an art. You can get results doing things your way as well. You just need it to be right for you.
In Investing
In corporate finance and in Wall Street and big funds in India who forecast a lot probably fall prey to this bias. They use models which don’t give the full picture which work for systems which have predictable results and they apply it in places like financial markets which are complex adaptive systems. Due to this they suffer big time when the one big hit does occur. Their models simply don’t account for all possibilities.
So basically our job is simple.
We have to understand investing in the financial markets is not a place where we can use normal models of predicting risk, returns or any other factor. There are many fields where you can predict. Like I don’t need to worry about someone who is 20 to wake up to be 35 tomorrow. Weather models have advanced very well. But using what worked there and changing a few things and applying it here does not work.
Sources:
Interesting find
That’s it, Enjoy your weekend.
Thank you for reading,
Samvit.