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Saturday, 13 November 2010

Yang's Law in Investing

By Albert Yang

Yang's Law ~ “Given two items A and B, of which you are an expert in A, and little about B, you will always invest more in B than A.”

Confidence Transposition ~ “People who are experts in one area, assume therefore they are experts in another.”

Background Blurb:

This law is one that I came up with after careful assessment of my own personal life and the problems I faced in my life. It stems from the observation that professionals, when they lose large amounts of money, almost never do so in their own field of expertise. They instead, invest more in areas they know very little about or are not in their field or scope of expertise.


Most authors write from the vantage point of experience that they have personally gleaned; and I am no exception. This has been a personal battle for me, and one that I am happy to share in hopes that by doing so, others can avoid the same mistakes I have made. The concept is simple to explain, but wrapped wholly in strange psychology. From Yang's Law, stems a corollary that is almost as profound, one that I aptly name Confidence Transposition. It is difficult to explain one without explaining the other, so I have grouped them together in hopes that it will increase your understand of them.

We shall start with the corollary first, and work our way to the law. Let's take someone we all know, the basketball player Michael Jordon. A legend in his own time, we may never see another basketball player like him ever again. Yet, when Michael Jordon retired, he tried out for the baseball team. Why would someone like Michael Jordon do something like that? The reason is, most believe (and wrongly) that if they are experts or professionals in one area, then they therefore can be experts in another area. This psychological conclusion, I have coined as Confidence Transposition: “People who are experts in one area, assume therefore they are experts in another.” This is why a large percentage of medical doctors play the stock market (and lose). They believe and say often, “I can do open heart surgery, how difficult can picking a few stocks be??” Consequently, most doctors invest in the stock market, and lose. Now we have a chicken and egg problem, leading us from the corollary to the law; while the doctor is an expert at medical practices, he knows nothing about stocks and finance; yet when it comes time to invest a large chunk of his money, HE WILL INVEST MORE IN THE STOCK MARKET THAN IN HIS OWN PRACTICE. This is then crux of Yang's Law: “Given two items A and B, of which you are an expert in A, and know little about B, you will always invest more in B than A.”

I am not a psychologist nor do I play one on TV, but this sort of behavior is unexplainable and yet happens all the time. This is the reason you hear doctors and lawyers, who are cautious when it comes to investments in their own professions; become a loose gunslinger with their money when it is a subject that they know little about. Be it a transposition of confidence on their part, of just a strange psychological phenomenon; one thing is for sure, Yang's Law applies to almost everything we do, and only through eternal vigilance can you really defeat it. Always work with your strengths and defer your weaknesses; it sounds like a simple concept that is well grounded, yet it is a concept that most of us never follow. Yang's Law, will be the reason people say things like “I love cooking; I don't know why I became an accountant instead of a chef.”

These sayings are simple admittance to being defeated by Yang's Law. Yang's Law, when combined with Confidence Transposition, spells almost guaranteed disaster; you will overinvest in something you really don't know that well; and you will justify it by saying that because you are an expert in A, you are confident that the choices you make about B are good. What is worse; to sell yourself on the false confidence, you will over invest in B, just to prove that you are an expert in it; (which you are not).

I can only share with the reader, that Yang's Law has ruined countless opportunities for me, understand it, and understand that NO, you aren't an expert outside of your field, and because of that, be cautious, and be overly cautious, never transpose your confidence and never invest in what you are not an expert in.

I want to let the reader know a few key differences about Parkinson’s Law, vs Yang’s Law. Parkinson’s Law, I liken to cancer or cirrhosis of the liver, it kills you slowly, day by day. Where as Yang’s Law, is like getting hit by a bus. You can be a doctor or a lawyer, be great at your profession, only to lose your entire life’s savings in ONE bad investment due to Yang’s Law. But be it death by bus, or death by cancer, both Parkinson’s Law and Yang’s Law will bring certain death to you (or make you wish you were dead) if you do not pay careful attention to them

1 comment:

  1. This is probably one of the most valuable advice you have given on this blog. I have personally experienced this in my life.

    ReplyDelete

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