Theory, Meet Practice

And The Moneyball Method

Because all good systems begin at the beginning, Part I of The Moneyball Method deals with economic philosophy. In particular, the virtues of money, prices, markets and earned profit. To break that down into digestible pieces, the book sets up five choices that seem to conflict but are in fact compatible and complementary.

Known as false dichotomies, they are theory vs. practice, reason vs. emotion, faith vs. force, moral vs. practical, and fact vs. value. This brief essay will highlight theory vs. practice.

Theory

“Sounds good in theory” is a commonly used phrase, but like most bromides, it needs to be examined. If a proposition “sounds good” but has not worked in practice, then something is wrong with the theory or something is flawed in the knowledge of the audience. In economics, “sounds good in theory” is usually assigned to collectivist schemes like socialism and communism. But you never hear “sounds good in theory” applied to capitalism or fascism.

Therein lies the rub: fascism is a collectivist scheme. And like its cousins, socialism and communism, it forces a duty upon the individual to contribute their talent and energy to “the common good.”

Yet, in the social context of Western culture today, fascism has been assigned to the same category as capitalism – right wing oppression. Why? In order to condemn capitalism without any knowledge or understanding of it. Why? Because capitalism is individualistic – as in the preface to America’s Declaration of Independence.

Practice

To understand how collectivist philosophy has inserted itself into the world of investment management, one place to start is behavioral finance. According to the Mason School of Business at the College of William and Mary, “It's an economic theory that explains often irrational financial behavior, such as overspending on credit cards or panic selling during a market downturn.”

As a byproduct of “behaviorism” in psychology, it presumes that people make decisions according to emotions that are pre-determined by their biology and culture.

To remedy the situation, the investment industry created risk tolerance questionnaires to assist clients with strategy decisions to avoid irrational behavior during extreme markets. The problem is, there is no such thing as “risk tolerance” in isolated circumstances. Without the context of financial assets, cash flow, personal obligations, aspirational goals, age and health – or risk capacity, then “sounds good in theory” propositions are nothing but false premises.

Moneyball

Other theories are inefficient markets, maximum diversification, reversion to the mean and externalities. Those lead to economic analysis, custom portfolios, tactical rebalancing and stakeholder capitalism. Sounds good, right?

In contrast, The Moneyball Method is grounded in solid principles that are proven by the achievement of each investor’s rationally chosen values. And to further prove this theory, the next essay will address the reason vs. emotion dichotomy.

https://www.amazon.com/Moneyball-Method-Middle-Class-Manifesto-Objective/dp/1696009111/