11 May Microsoft’s Age Guessing Software and Wittgenstein’s Ruler – How they can Help us Become Better Investors
Last week, a couple of Microsoft engineers launched a nifty software called how-old.net at the company’s annual developer’s conference. Using advanced technology and algorithms, the program was able to predict the age of people in the pictures uploaded to the site.
Netizens and social media sites had a field day. Pictures of celebrities, politicians and famous people with their ‘microsoft age’ were shared non-stop. Because their age was no secret, their microsoft-age became the stuff of jokes. Here are some you might find interesting.
And of course, people tested the program to its limits, uploading all kinds of material for how-old.net to process.
Is the ruler measuring the table, or is the table measuring the ruler?
In his book, Fooled by Randomness – The Hidden Role of Chance in Life and in the Markets, Nassim Taleb shared a truism called Wittgenstein’s Ruler. To quote him,
Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler. The less you trust the ruler’s ability, the more information you are getting about the ruler and the less about the table.
The concept of the Ruler is simple yet fascinating. It is used to explain the relationship between a person passing judgement on someone or something, and the person or the object being judged. Taleb used the concept to highlight his contempt for the reviews his controversial books garnered. Reading the reviews on Amazon.com, he concluded that the comments tell more about the reviewer than the book itself.
Over the years, I have come across many instances of these situations in real life.
For example, if a person complains about the service in a restaurant and screams at the waiter, it could mean two things. It could be that the service is horrendous and the staff are downright rude. It could also be that the customer is an unbearable and obnoxious prick. Unless we know for sure that the customer (ruler) is a well mannered, undemanding and understanding person, the incident does not really tell us much about the service (the table).
Similarly, I had a friend come by with a recommendation for cheap Japanese food. I was hopeful and excited. Eventually, the bill for the two of us came up to some few hundreds. It was quality food and ‘cheap’ by his standards. After the meal, I know more his (the ruler’s) yardstick for ‘cheap’. Without this benchmark, the meaning of ‘cheap’ (and hence the length of the table) would be impossible to gauge.
Wittgenstein’s Ruler and the Financial Markets
The relationship cannot be more pronounced in the financial markets.
Day in day out we are bombarded with news, analysis and recommendations about what stock to buy, what instrument to invest in, when to buy and when to sell.
Once again – if you use a ruler to measure a table, you may also be using the table to measure the ruler. Unless you know for sure that the ruler is accurate and calibrated, otherwise any measurement it makes is more than likely to be wrong.
The next time a stock recommendation falls on your lap, ask yourself these questions – does the person know what he is talking about? Is he merely parroting a recommendation or is his expertise real? What is the time frame and how does it compare with yours? What is his recommendations based on and again does it differ with your stock picking strategy?
Has he made previous recommendations before? What are the recommendations that did not play out the way he said it would? What would he or she stand to gain if the stock price increases?
The next time you read that property prices (or for that matter, oil prices, gold prices, interest rates, unemployment rates, etc etc) are rising or falling/will rise or fall, ask the same set of questions as well.
The same for alternative investments, be it land banking, fish farming, investing in heritage buildings or buying and storing precious metals.
Understanding the Ruler
In how-old.net’s case, the Ruler-Table relationship is flipped around. Age is usually public domain. By trying to figure out something everyone already knows, the only purpose it serves is to tell everyone how accurate (or far off the mark) it can be.
Unfortunately in the financial markets, there are too many amateur and professional pundits making far more predictions than we can ever track. Understanding that, and understanding the Wittgenstein’s Ruler will allow us to make better investment decisions!