Behavioral Finance

52 Card Pick-Up

By, 06/08/2007

Two brothers, ages ten and four, are killing time on a lazy Saturday afternoon. The older one picks up a deck of cards.

"Hey, you wanna play 52 Card Pick-Up?"
"Sounds fun! Let's play!" says the exuberant younger brother.
"Are your sure?"
"Yay! I like card games! How does it work?"
"Oh it's easy. I'll show you. Ready?"
"Yes!"

The older brother takes the deck and flings it into the air. The cards flutter and scatter to the floor in a terrific mess. "Ok…pick ‘em up! That's the game!" He laughs heartily and leaves his younger sibling to pick up the cards.

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This is a malicious prank, and a truly scarring incident in the young life of one MarketMinder editor. But the story has a lesson greater than the obvious wisdom that older brothers are always and everywhere scoundrels.


52 Card Pick-Up can tell us a lot about markets. Donald J. Boudreaux recently penned a fascinating article on probability and the emergence of an ordered universe based on the work of economist Paul Romer.


Marvelous Properties
By By Donald J. Boudreaux, The Pittsburgh Tribune-Review
http://www.pittsburghlive.com/x/pittsburghtrib/opinion/columnists/boudreaux/s_507822.html

"Each time you shuffle a deck, you produce an arrangement of cards that exists for the first and only time in history. The arithmetic works that way. For a very small number of items, the number of possible arrangements—which item is first, which item is second, which is third, and so on—is small. Three items, for example, can be arranged only six different ways. But the number of possible arrangements grows very large very quickly. The number of ways to arrange five items is 120. For 10 items it's 3,628,800. For 15 items it's 1,307,674,368,000. The number of different ways to arrange 52 items is 8.066 times 10 to the 67th power. This number is so enormous that no human can comprehend it. By way of comparison, the number of ways to arrange a mere 20 items is 2,432,902,008,176,640,000—a number larger than the number of seconds that elapse in the course of 10 billion years. And this number is microscopic compared to 8.066 times 10 to the 67th power."


These unfathomable combinations occur from a simple 52 card set. Now, think of the global economy with billions (if not trillions) of individuals and variables buzzing around the world every day to generate the combinations that make the world. It's beyond comprehendible! Mr. Boudreaux goes on:

"How, then, to select from all the possible arrangements of resources those relatively few arrangements that serve human ends? Central planning won't work. No human mind, or group of minds, can even list -- much less rank -- the gigantagazillion different possible arrangements of resources."


Mr. Boudreaux credits private property as the primary reason for an ordered economy—and we would not disagree—but there is another side to the coin.


We think the crux of the matter is the recognition that free markets, inclusive of the principle of private property, know better than any individual how to order things from seeming randomness. When we cultivate a little humility and think of the limits of our individual knowledge, of how little our tiny minds can really comprehend, it's easy to see the superiority of market-based systems over any other scheme of resource allocation.


The mind can only hold one or two things in consciousness at a time, yet markets keep millions of things in mind always! Free markets interconnect the wide breadth and diversity of all that's happening out there and link them to each other in meaningful ways. This is more important than ever today as the global economy and its many variables continue expanding.
Yet, arrogance and overconfidence persist in stock investing. What sheer folly it is to believe anyone can forecast stock movements (let alone the course of an economy) far into the future! We often hear statements from well-respected economists like "It looks like it will be a rough decade for the stock market!" or "I think stocks will go up for the next five years!"


Sorry, but we think it's really difficult to simply understand what will happen next month, let alone five years out. Consider this headline from today's Wall Street Journal:


MIT Scientists Pave the Way For Wireless Battery Charging
By William M. Bulkeley, The Wall Street Journal(*site requires registration)
http://online.wsj.com/article/SB118123955549228045.html?mod=hps_us_at_glance_most_pop


This seemingly small event has huge implications for the future of technology. Wireless energy! The possibilities are endless. Few, if anyone, could see this coming years ago, and no one knows exactly how it will play out in the future. But rest assured, the markets will figure it out long before any of us.


In the end, disciplined stock investing is about forecasting no more than a year or so into the future. If you take each year, one at a time, the long term will take care of itself. The world is simply too complex and vast to know what's going to happen far into the future. That kind of gullibility is reserved for those who enjoy a rousing game of 52 Card Pick-Up.


Have a great weekend.


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For those looking for a little challenging summer reading on chaos, emergence theory, and the randomness of markets, we suggest:


Chaos: Making a New Science
By James Gleick
The timeless classic on the order that arises from chaos and randomness.
http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?z=y&EAN=9780140092509&itm=1


Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
By Nassim Nicholas Taleb
The principles of randomness applied directly to markets…
http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?z=y&EAN=9780812975215&itm=1


Emergence: The Connected Lives of Ants, Brains, Cities, and Software
By Steven Johnson
A concise and entertaining treatise on emergence and connectivity in the world.
http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?z=y&EAN=9780684868769&itm=2

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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