If you want to lead a healthy life, it is easier to avoid eating junk food than trying to get rid of them after they enter the body. The latter requires more effort. Prevention is the best defense. The same is for the mind. To think well, it is best to avoid bad information since it’s hard to remove them once they turn into beliefs. Then there’s the opportunity cost that a minute wasted on bad information is a minute not spent on acquiring wisdom. Bad information (or noise) is anything unhealthy that:
- Increase error rate
- Reduce decision quality
In other words, it creates folly. So having good filters is the first step to avoid fooling ourselves. Imagine our thinking as a glass of water. It gets murkier as more and more bad information mix with the good ones. These filters are there to keep it as clear as possible. There are 3 types of filters to guard against folly.
Time filter
Lengthening the time horizon stress test the usefulness of information. A long time frame question such as “Will this information remain relevant in 10 years time?” is a better filter than one that asks “Which piece of news should I read today?” The difference is in the way we frame things. Making choices from the standpoint of daily life causes us to ‘tunnel’ vision and ignore other options. Just as companies with high return on capital are more valuable than those that are not, you should aim for a high return on time as often as possible.
Role model filter
The minds of great investors are powerful filters. This is why people study their investments to understand how they think and make decisions. Before you spend any time on an activity, always ask “Will my role model spend a considerable time on this? Why and why not?”. Seeing things from a successful person’s perspective act as a filter that changes your viewpoint. Or let’s say you are interested to read more books but you have no idea where to start. The role model’s list of recommended books is a great filter. These are the books that have gone through a rigorous filter of the best minds.
Incentive filter
This filter finds out the motive of a person or organization, which is one of my favorites. Take analysts report. What is their motivation? So you can be successful in investing? Of course not. Their incentive is to encourage you to make more trades and there’s nothing wrong with it. It is just the way it is. Same goes for market news. Their incentive is to increase readership and make a profit by getting your attention in the shortest amount of time. Contrast this with things written by Howard Marks (Oaktree Capital), Ray Dalio (Bridgewater Associates) or Warren Buffett. They have less of an agenda to sell you things. They are already successful backed by their own track record.
The idea of filter out bad information is similar to focus on the downside or don’t lose money. They are important and relatively easier to enforce but receive less attention because they are boring. It is exciting to sell more information “Access all real-time financial data” or high return “How to make 100% return in a month” than it is to sell the opposite. Bad information is more than just a waste of time, it impedes our ability to think clearly. So keep that glass of water clean.
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent .” – Charlie Munger
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