Challenging Embedded Assumptions

Cognitive Investing takes a holistic approach to the task of investing, carefully examining the connections and interdependencies that are lacking in most other approaches.  An important aspect of this holistic approach is to question the assumptions that most investors accept unconsciously.  Many of these assumptions are misleading, oversimplify a more complex reality, only apply in particular circumstances, or obscure what is truly important.

One of my goals with this blog and the book, Cognitive Investing, is to expose, examine, clarify, and challenge the validity of many embedded assumptions in the financial landscape. Many other writers have questioned these assumptions, but few, if any, have packaged all of them together and collectively examined their shortcomings with the goal of finding a deeper truth.

Is it true that

  • The future is foreseeable?
  • Basing your investments on a particular future scenario is a good idea?
  • Understanding the difference between investing and gambling is not important?
  • Past performance is a good indicator of future results?
  • Market prices are driven by a mismatch in the amount of buying vs. selling?
  • Rising markets are always good and falling markets are always bad?
  • You get what you pay for when buying financial services?
  • The stock market’s performance reflects the economy’s performance?
  • There is a tight linkage between a company’s performance and the behavior of its stock price?
  • Production is better than consumption?
  • One should focus on growth industries to find the most successful investments?
  • The fastest growing countries offer the best investment opportunities?
  • Volatility is essentially the same thing as risk?
  • Risk can be profiled on a linear scale?
  • Risk should be controlled through security selection?
  • Diversification’s primary benefit is for downside protection?
  • One should focus most of one’s efforts on the question of what to buy, rather than when or how much to buy, or what, when, and how much to sell?
  • There is no problem investing in asset classes with a negative expected return?
  • Uncertainty is higher now than ever before?
  • Focusing on uncontrollable or unknowable events is a worthwhile expenditure of time and attention?
  • It is important to understand how others are investing so that their tactics can be emulated?
  • Nuance can be dismissed?

Understanding the answers to these questions is imperative if one hopes to thrive in today’s complex financial environment.  Cognitive Investing will guide the way.

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