I came across the famous saying in my childhood: If all you have is a hammer, everything looks like a nail
I never understood the essence of this statement for a very long time. Few years back, I came across Charlie Munger’s writing on Elementary Worldly Wisdom that explained the meaning clearly.
What are the models? Well, the first rule is that you’ve got to have multiple models—because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does. You become the equivalent of a chiropractor who, of course, is the great boob in medicine.
1. What causes man with a hammer syndrome?
It’s like the old saying, “To the man with only a hammer, every problem looks like a nail.” And of course, that’s the way the chiropractor goes about practicing medicine. But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you’ve got to have multiple models. And the models have to come from multiple disciplines—because all the wisdom of the world is not to be found in one little academic department. That’s why poetry professors, by and large, are so unwise in a worldly sense. They don’t have enough models in their heads. So you’ve got to have models across a fair array of disciplines.
2. Efficient Market Theory
Efficient Market Theory(EMT) states that
- Market is always efficient.
- No investment strategy would be better than a coin toss.
- It is not possible for an investor to beat the market.
If EMT were true then how do we explain these results?
Partnership Period Return Market Return Buffett Partnership, Ltd. 1957–1969 29.5% 7.4% Charles Munger, Ltd. 1962–1975 19.8% 5.0% Sequoia Fund, Inc. 1970–1984 18.2% 10.0% WJS Limited Partners 1956–1984 21.3% 8.4%
What made these economists love the efficient market theory?
Munger explains it in ‘Psychology of Human Misjudgment‘
And after all, math was what they’d learned to do. To the man with a hammer, every problem tends to look pretty much like a nail. The alternative truth was a little messy, and they’d forgotten the great economists Keynes, whom I think said, “Better to be roughly right than precisely wrong.
EMT had a great influence on me and I am a firm believer of index investing. There is nothing wrong in that. But I never even tried investing in individual stocks, which is bad. After reading Munger’s writing I have changed. One of the economists who won the Nobel prize for his work on EMT explained Berkshire’s success in the following way.
In fact one of the economists who won — he shared a Nobel Prize — and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn’t quite as efficient as you think, he said, “Well, it’s a two-sigma event.” And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas — better to add a sigma than change a theory, just because the evidence comes in differently. And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone.
3. How do we not have man with a hammer syndrome?
According to Munger, we have to “jump jurisdictional boundaries” and grab the most appropriate models from multiple disciplines that best solve the problem at hand. Sanjay Bakshi, professor whose writing helped me to learn a lot explains about ‘Are CFOs Men With Hammers‘
4. Man with hammer in my profession
I worked in Oracle for few years and developed HR Applications. All the business logic were written in PL/SQL. There is nothing wrong in that. My view of software got changed and I tried solving all the problems using the database. After leaving Oracle I developed a search application and I used a 7 table join to render the search results. What is the issue with the approach? This will not scale. During that time open source software like Apache Lucene was available and I never bothered to learn and use it. What I had was Man with a hammer syndrome.
Over the last few years the demand for Full stack web developer is very high. People with these skills can do frontend and backend software development. Sometimes I wonder is this really hard? Should this not be the norm? May be the software industry is embracing specialization like Adam Smith – Pin Factory or is this man with the hammer syndrome?
In the book The Pragmatic Programmer: From Journeyman to Master the authors defines the pragmatic programmer as
Pragmatic Programmers are not wedded to a particular methodology, language, operating system, notation, whatever. Instead, they use their experience, combined with research, to choose the most appropriate combinations of tools for the job at hand. Pragmatic Programmers are not hammer wielders in search of nails.
But what is the reality?
These people are in the minority!