The path to knowledge

“The suppression of uncomfortable ideas may be common in religion or in politics, but it is not the path to knowledge” – Carl Sagan

The result of the recent EU referendum wasn’t what I’d been expecting, nor was it what I’d hoped for. Judging by the rhetoric coming from both sides, a lot of people are profoundly uncomfortable with ideas they disagree with.

So how can we make the best of it?

When someone presents us with an idea we strongly disagree with, the natural human temptation is to dismiss the idea out of hand. If we disagree very strongly, we’ll instinctively make certain assumptions about the person presenting the idea. At best, we’ll assume they haven’t thought about it properly, or they’re just not very bright. At worst, we’ll assume they’re acting in bad faith. Either way, we will probably be less receptive to their ideas in future.

But if we can pluck up the courage to explore an uncomfortable idea properly, it often turns out to be much more complex than it at first appeared. We often find that plenty of people have thought it through carefully, and written about it intelligently. They usually turn out to have honest, positive reasons for their views, completely unrelated to the base motivations we had assumed.

We may still disagree with the idea, but by exploring it with an open mind, we gain a broader understanding of the landscape. Crucially, we may discover weaknesses in our own reasoning, and our thinking may become more robust as a result.

In finance, there is an additional aspect to this. If certain outcomes are dismissed as impossible by enough participants in a market, then they will not be reflected in prices. An investor who is willing to explore these outcomes and try to understand them may be able to identify opportunities – or risks – that others have not considered.

Until fairly recently, if you were building a model to represent interest rates, and your model allowed for negative values, a lot of people would have considered that a flaw. A model in which only positive values make sense mathematically would have been considered more suitable. With hindsight, as gilt yields have headed steadily south, it seems that market participants had overestimated the future course of interest rates.

It always pays to explore ideas that you are supposed to dismiss out of hand. At worst, you will gain an understanding of why those ideas are wrong. At best, you will discover opportunities to which the majority have chosen to be blind.


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