“All I want to know is where I’m going to die, so I’ll never go there” - Charlie Munger
Carl Gustav Jacob Jacobi was a nineteenth century mathematician famous for his work on elliptic functions, amongst other accomplishments. Oddly he ends up being frequently quoted by Charlie Munger and Warren Buffett, despite having no known connection with the investment world.
I Wouldn't Start From Here
Jacobi great contribution to investor thinking was his maxim “man muss immer umkehren”: invert, always invert. Of course, Jacobi was actually making a statement about mathematics, not investment thinking, but we shouldn’t much care where we get our models from, as long as they have the distinct advantage of being useful.
Charlie Munger uses the Pythagorian proof that the square root of 2 is irrational as an example of inversion – because they started by trying to prove it wasn’t irrational and wound up with a contradiction that could only be resolved by assuming it was. This idea – that we should try to prove the opposite of what we really want – is the key concept behind inversion.
It hopefully goes without saying by now (c.f. The Big List of Behavioral Biases) that we’re all biased in various ways, many of which are beyond our conscious control, which leaves us with the tricky conundrum of knowing that we’re making mistakes but being unable to control them. Dealing with this is obviously difficult, but one of the recommended techniques is to try and take multiple viewpoints on the same problem – which is easy enough to state but fiendishly hard to put into practice, since it tends to be quite hard to build Chinese walls in our minds, short of having some rather brutal and irreversible brain surgery.
Technically there is a way of finding the optimal path to achieving the best solution, and we’ve discussed it in Dividends Keep You Anchored and (more subtly) in Games People Play: it’s called backwards induction. At its simplest this involves identifying where you want to end up and then working out the best route to getting there by reversing the sequence of events. Think of it as playing chess in reverse; at each move you work out the best next move and then go back in time to consider the previous step.
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