On Being Wrong for the Right Reasons

This is part of a collection of random essays and jots written on coffee-fueled Sunday mornings. Each is inspired and informed by a passage from something I’ve read recently. Hope you enjoy :)

From investor Howard Marks:

“The correctness of a decision can’t be judged from the outcome. Nevertheless, that’s how people assess it. A good decision is one that’s optimal at the time it’s made, when the future is by definition unknown. Thus, correct decisions are often unsuccessful, and vice versa.”

A few weeks ago, I wondered if it’s better to be right for the wrong reasons, or wrong for the right reasons. I’ve been reading a lot lately to see if there’s an answer to this question, or whether this is just a false dichotomy. Howard Marks clearly has an opinion on this — and he bases it in part on the distinction between “first-level thinking” and “second-level thinking”:

“First-level thinking says, ‘It’s a good company; let’s buy the stock.’ Second-level thinking says, ‘It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”

Many smart people only get as far as first-order thinking. When there is a problem to solve, efforts spill towards the same small handful of solutions. When you possess above-average intelligence, it’s easier to do fake-smart things that only appear smart than to do actually smart things (which often appear crazy or stupid).

“First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority. […] Second-level thinking is deep, complex and convoluted.”

“[…] The bottom line is that first-level thinkers see what’s on the surface, react to it simplistically, and buy or sell on the basis of their reactions.”

For first-level thinkers, the competition is over who can perform marginally better. However, this leaves huge swaths of the possible solution space uncovered. First-level thinkers have a tough time distinguishing popularity from truth.

Second-level thinking often results in solutions that counter conventional wisdom. This is because second-level thinkers try to expand the relevant solution space, then prod/poke/tinker around in this expanded space (rather than instinctively rushing to where everyone else is).

So being right for the wrong reasons is the fluke of a first-level thinker. You make the false conclusion that what you’re doing is working, and you double-down on it. This is a fragile strategy. The likelihood of being repeatedly right when you have the wrong reasons is low.

By contrast, being wrong for the right reasons is the fluke of a second-level thinker. If you’re repeatedly wrong, chances are your reasons aren’t right, and so it’s back to the drawing board to get them right.

Adapted and reposted from ammarmian.posthaven.com