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Investing: The Last Liberal Art Paperback – January 1, 2002
There is a newer edition of this item:
- Print length224 pages
- LanguageEnglish
- PublisherTexere
- Publication dateJanuary 1, 2002
- Dimensions6 x 0.75 x 9 inches
- ISBN-101587991381
- ISBN-13978-1587991387
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- Publisher : Texere; 1st edition (January 1, 2002)
- Language : English
- Paperback : 224 pages
- ISBN-10 : 1587991381
- ISBN-13 : 978-1587991387
- Item Weight : 11.2 ounces
- Dimensions : 6 x 0.75 x 9 inches
- Best Sellers Rank: #1,073,442 in Books (See Top 100 in Books)
- #4,628 in Finance (Books)
- #7,642 in Investing (Books)
- #9,206 in Personal Finance (Books)
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How does one achieve worldly investment wisdom? Hagstrom believes that it is an ongoing process of acquiring the significant concepts-the models-from many areas of knowledge and then learning to recognize patterns of similarity among them. The first is a matter of educating yourself; the second is a matter of learning to think and see differently. Hagstrom notes that acquiring the knowledge of many disciplines may seem a daunting task. Fortunately, you don't have to become an expert in every field. You merely have to learn the fundamental principles-what Munger calls the big ideas-and learn them so well that they are always with you.
Hagstrom's book is intended as a starting point for this self-education process. He examines a specific discipline-physics, biology, social sciences, psychology, philosophy, and literature-from the perspective of its contribution to a latticework of models. Hagstrom does a great job of explaining the role of complexity theory in understanding financial markets and the evolving global economy.
After you read Hagstrom's book, you will be on your way to achieving worldly investment wisdom.
The idea of attaining "worldly wisdom" is a huge goal and one can only benefit immensely by trying to attain it--a lifetime project.
This book is not for the average investor however (though they will benefit). It's for those who are already advanced in the investment game and want to achieve the extra edge.
This is also a book for those who would like to be more well rounded in their thinking; it will also appeal to the intellectuals.
This is not really a book about investing, as much as it is a book on how to think better--perhaps it needs to be retitled once more and placed in the self help book category on how to think better and to be a better person.
For those arm chair investors who want a more practical application of worldly wisdom, read Janet Lowe's book on Bill Miller "The man who beats the S&P". It was Miller's "worldly wisdom" attitude that lead to Hal Varian and Brian Arthur who introduced Miller to the notion of increasing returns which allowed Miller to think in a different way than the average investor about...Amazon.com.
The rewards of worldly wisdom are significant!
Hagstrom then takes us on a tour of physics, biology, social sciences, psychology, philosophy and literature. In approximately 20-page chapters, he presents some essentials in each field that apply to investing.
Physics, for example, has long embraced the notion of equilibrium. Equilibrium also permeates finance; for example, supply and demand are equilibrated by the proper price. A key idea in biology is Darwinian natural selection. Hagstrom draws parallels between natural selection and the evolution of profitable trading strategies; unprofitable strategies die off in the process of competition.
The social sciences also give us insights into how people behave in groups, whether as political parties, as investors, or as cultures. These fields show emergent behavior of groups of individuals, and that the behavior of the group is more than the sum of it's parts. In economies, Adam Smith's "invisible hand" guides us towards the goal of properly rationing resources. Cities evolve distinct neighborhoods without any centralized planning. The stock market crashes occasionally as investors react to others reactions.
Psychology is also an area of prime interest to investors, because emotion and cognition influence decision-making. The emerging field of behavioral finance has shown that the market tends to overreact to news, and that a contrarian investment strategy can be profitable. Indeed, investors can often attest to an internal struggle between fear of and greed. Unchecked, these can lead to gold rushes, internet mania, or stock market crashes.
In the field of philosophy, Hagstrom focuses on the "pragmatism" movement in America, which believed that ideas are "true" if they have practical value and provide some benefit to you, rather than conforming to some transcendent absolute "truth." Adopting a pragmatic point of view may allow a trader to more easily move to a new trading model or cut losses rather if a given model or position isn't working.
Finally, Hagstrom discusses literature. He notes that literature not only stretches our imagination, but it can also teach us to read analytically, think critically, separate fact from opinion, and to discuss ideas with an open mind. This mental flexibility is crucial not only as investors in digesting news, but also as human beings.
In many of these chapters, Hagstrom returns to the emerging science of complex adaptive systems, which provides a unifying theme. Complex adaptive systems have a large number of individual units, and these units can be anything - ants, neurons, votors or investors. These units change or adapt their behavior based on their interactions with other units as well as the overall system. These systems have self-organizing properties, and generate emergent behaviour beyond the behavior of individual units (i.e. cities `spontaneously' form distinct cultural neighborhoods without planning). These systems are constantly evolving and in flux, and occasionally go through periods of sudden change (like an avalanche, or stock market crash). The common qualities of complex adaptive systems have implications for investors. The market will always be in flux, not in equilibrium, and it's more organic and emotional than mechanistic; as a result, it has small constantly changing inefficiencies that people compete to take advantage of.
Overall, my one general criticism of the book is that one can see how these fields might apply to investing at a concept level, but of course "the devil is in the details." If you're an experienced investor, you will NOT read about how all this applies to the CAPM, or what you should do now with your 401(k). But to be fair, Hagstrom says in his preface that that's not his goal - it would be impossible in one book to flush out all the details. That being said, I thought it was valuable how he described the interdisciplinary fields of "complex adaptive systems" and "behavioral finance" - these are indeed important new areas of research, ones that may reap benefits in the future. Without an interdisciplinary view of finance, these promising fields would not have come into being.
So in summary, I think this was a light, quick, enjoyable quick tour through the intellectual history of many fields. It was a valuable reminder to think outside of one's discipline to keep perspective and gain new insights. So if you want to think in a broader way about markets, then I'd recommend it.