A quote being attributed to someone famous for being smart is supposed to make us think it is profound. The juxtaposition of rhyming opposites – such as in the Einstein quote – has been found to increase our feeling that it is true. Thus, the replacement over time of a rhyming misquote for the original. Authority, poetry: no need to engage any critical faculties. Except its assertion – “The most incomprehensible thing about the universe is that it is comprehensible” – is utterly wrong.

Any life forms that evolved in this world had to make ongoing sense of some portion of it. As our ancestors evolved over the millennia in this world, they had to comprehend some portion of it in order for us to be here now. The life forms that found it incomprehensible are extinct. (Or there is the divine argument; the Creator would not deceive his most favored creation.)

Which still begs an unexamined assumption. In what sense does our knowing/comprehension correspond with this world?

“It is even a difficult thing for him to admit to himself that the insect or the bird perceives an entirely different world from the one that man does, and that the question of which of these perceptions of the world is the more correct one is quite meaningless, for this would have to have been decided previously in accordance with the criterion of the correct perception, which means, in accordance with a criterion which is not available.” – Friedrich Nietzsche (1873) On Truth and Lies in a Nonmoral Sense

I am not actually a fan of Nietzsche. (This is the Availability bias. So far, you have only seen quotes from Einstein and Nietzsche, and depending on your motivated reasoning are inclined to opinions of me on this matter.) Except I quoted this essay because it is 140 years old. My point is that these are not new ideas. I could have used other examples. Even the Behavioral Economics research which substantiates and elaborates (considerably on) these earlier insights dates back as much as 50 years. So, why is it most of us don’t know about it?

And your likely answer is the answer. It might be, “I don’t care about philosophy or physics, or what a bird sees, I’ve got trades to make/investments to manage.“ True enough. And who are you making those trades?

Here is a more recent version of the above paraphrased from the work early systems thinker C. West Churchman.

A modern organization is a hierarchical system made up of several levels with different forms of inquiry and rationality. Solving problems (which involves comprehending them) requires knowledge of these levels and their methods. These are likely to include: workers, managers, engineers, scientists, economists, lawyers, (formal or informal) politicians, and more.

Again, you might ask, “How does that relate to me?” For trading and investing, the financial systems (for there are more than a few) are made up of participants and perspectives that include: banks, brokerage, insurance, businesses, funds of every kind, financial instruments and products of every kind, analysts of every kind, advisors of every kind, lawyers, salesmen, accountants, and oh yes, individual traders and investors on this incomplete list. What is your role as a market participant and what perspective does that offer you? Whatever it is, it is as limited as in the man, insect, bird example, or the worker, manager, engineer example. Or to put it another way, any trader or investor who thinks his brokerage firm is looking at the market the same way he is doesn’t understand the business he is in.

So, we know what we know, and we don’t know what we don’t know, and that’s the way it will always be. Except that does not excuse not wanting, even needing, to know more, while at the same time holding what we know as lightly as we can. How can we do that? An actual beginning would involve questioning the authority-based true sounding givens, getting a perspective on where you are in the overall system, and increasing the kinds of (real and imagined) experiences you have – as you have just done while reading this.

The quote previous attributed to Albert Einstein is inaccurate even though it is the one you will find in an Internet search. The actual quote, from his essay entitled Physics and Reality (1936), is “the eternal mystery of the world is its comprehensibility.” It is clear from the context and quotation marks that he was referring to someone else as the author.

I could have easily edited that initial quote away and no one would have been the wiser, but it is instructive of what I am attempting to accomplish here. It points out that what we, including me, think we know may not be so. And that a bit more digging – something we are often disinclined to do – can reveal entirely new knowledge. In this case, that the meaning we make of something is often not at all what the author intended.

For example, Stephen Hawking and Leonard Mlodinow (2010) concluded from that quote that, “The universe is comprehensible because it is governed by scientific laws; that is to say, its behavior can be modeled.”

Whereas Einstein on the very same page of his essay states,

“In my opinion, nothing can be said concerning the manner in which the concepts are to be made and connected, and how we are to coordinate them to experiences. In guiding us in the creation of such an order of sense experiences, success in the result is alone the determining factor. All that is necessary is the statement of a set of rules, since without such rules the acquisition of knowledge in the desired sense would be impossible. One may compare there rules with the rules of a game in which, while the rules themselves are arbitrary, it is their rigidity alone which makes the game possible. However, the fixation will never be final. It will have validity only for a special field of application.”

Note: Einstein wrote that “nothing can be said” as to how our sense experiences and concepts are made or related to each other. Instead, he uses the metaphor of a game with rules wherein the “scientific laws” of physics are the rules – which are never final and “will have validity only for a special field of application.”

As this blog is entitled Higher Level Trading, here is an explanation of the analogy. It is our all too human tendency is to take something cleverly phrased as true instead of examining it further. Once something is taken as true, even the best and brightest among us (see above) are more inclined to justify it rather than question it.

A higher-level trading strategy is to resist the urge to explain what you cannot, and instead figure out what has to be there for the system to produce what it does. In both physics and markets, this can be summarized as a statement of a set of rules. Rules are related to games (among other ‘things’). That Trading is a Game is a well-worn metaphor among traders. Games have fixed rules – though they turn out to be somewhat flexible and not always enforced. Game rules can and do change. More important for our purposes, a set of rules is valid only at a specific level of play. Some examples in trading, from shorter time interval to longer, include: high frequency, scalping, swing, position, seasonal, and macroeconomic. Analogous to physics, above or below a given scale/level of play, and a different set of rules apply. Traders unaware of this won’t know their own level of play – how could they – much less what game level they are playing on. The same is the case for most investors.

This blog will explore what these levels are, how they work, and how to work them.