Published on: 20 Dec, 2018

Memory in all its avatars (perception, projection, intelligence) plays a big role in how we invest. The fragility of our memories (both in the sense of how quickly they fade and in the sense of how susceptible to manipulation they are) suggests that we need to be careful with how we deal with memories.

“Intelligence is not only the ability to reason; it is also the ability to find the relevant material in memory and to deploy attention when needed.”Daniel Kahneman in “Thinking, Fast and Slow” (2011)

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Memory helps us project

Henry Molaison suffered his first major epileptic seizure on his fifteen birthday. Thereafter the seizures became more frequent and faced with a future of violent convulsions, Henry underwent surgery which removed the middle part of the temporal lobe on both sides of his brain. The seizures stopped but there was one side effect – Henry could no longer form any new memories. His peculiar state allowed scientists to understand why memory exists in the form it does. More specifically, because Henry could not form any new memories, he was also unable to imagine the future. If you asked Henry “What would it be like to go to the beach tomorrow?”, all he would be able to say is “I can see the colour blue”. (Source: “The Brain: The Story of You” by David Eagleman)

Henry’s plight suggests that the real purpose of the brain is not to record the past but to allow us to project into the future. To imagine what it would be like to go to Goa in July, for example, my hippocampus pulls together my memories of Goa (from my visits, from what people have told me about Goa, from what I have seen on TV) helps me create an imagined future wherein I am sitting in a beachside shack in Goa with a glass of feni whilst the rains lash the Arabian Sea.

My friend, Anupam Gupta, and I have written a piece for The Ken on this subject. You can find it here: https://the-ken.com/story/step-into-the-memory-palace/

Memory helps us perceive

We might see a fellow passenger on a plane or a bus and tell ourselves that “she looks like so and so from college”. This form of “seeing-perceiving-relating to what’s in our memories” is a common routine that all of us go through many times in a day. As Nick Chater says in his book “The Mind is Flat” (2018):

“The brain interprets one word, face or pattern at a time, but in doing so it simultaneously explores possible links between the current stimulus and a vas array of memories or interpretations of past stimuli…The resonance between perception and memory must occur ‘in parallel’…Given our sluggish neurons, matching the current perceptual input with each of our vast repertoire of memory traces one at a time would be unfeasibly slow. And, when interpreting a new stimulus, the brain may have little idea which memories it needs to search – indeed, it seems able to draw on its entire stock of memory traces equally easily. Before the interpretation has been made, the brain can’t know which memories will be relevant – so it has to search them all. Notice that…each new perceptual interpretation is based on memories of past interpretations. We never see the world ‘with fresh eyes’. Each new interpretation is an amalgam and transformation of past interpretations…” [Bold font is ours]

Our memories are fragile and prone to manipulation

It is tempting for us to believe that in a changing world, our memories are the only constant an intellectual support system which holds our identity together – tempting but wrong. Our memories not only fade but they also get coloured by subsequent events. Professor Elizabeth Loftus of the University of California at Irvine demonstrated this using a simple experiment wherein she first showed a group of volunteers a video of two cars colliding with each other. Then she asked some of the volunteers “how fast were the cars moving when they hit each other?” and the other the remaining volunteers “how fast were the cars moving when they smashed into with each other?” The latter group reported much higher speeds for the cars – just two words “smashed into” were responsible for the latter group of volunteers’ memories being coloured.

Not only can others colour our memories, we can colour our memories ourselves. For example, a year ago my wife and I had dinner with some friends who looked like a happy suburban couple. A few months later we heard that they were separating from each other. That extra bit of information started colouring my perception of our dinner with the now estranged couple. Wasn’t the wife’s laughter over dessert a touch strained? Wasn’t the husband’s eyes roving a bit more usual?

And that brings us to one of the most mindblowing paradoxes in pscychology – your memories are distinct from your experiences. In other words, what you remember of an event is very different from what you actually experience. A real life episode from Prof. Elizabeth Loftus’ life illustrates this point:

“…when Elizabeth was a child, her mother had drowned in a swimming pool. Years later, a conversation with a relative brought out an extraordinary fact: that Elizabeth had been the one to find her mother’s body in the pool. That news came as a shock to her; she hadn’t known that, and in fact she didn’t believe it. But, she describes, “I went home from that birthday and I started to think about other things that I did remember – like when the fireman came, they gave me oxygen. Maybe I needed the oxygen ‘cause I was so upset that I found the body?” Soon, she could visualise her mother in the swimming pool.

But then her relative called to say he had made a mistake. It wasn’t the young Elizabeth after all who had found the body. It had been Elizabeth’s aunt. And that’s how Loftus had the opportunity to experience what it was like to possess her own false memory, richly detailed and deeply felt.” (Source: “The Brain: the story of you” by David Eagleman)

Memory is a form of intelligence

As Danny Kahneman says in quote cited at the beginning of this piece, memory is a form of intelligence. In fact, some psychologists say that intelligence is nothing more than a deep, specialized bank of memories. The following example will help you understand why.

Read the following three statements and tell me if the third statement true or false:

Crocodiles are mammals. Mammals have babies. Therefore crocodiles have babies.

The third statement is false because the first statement is false. Even though by asking you to focus on the third statement, I am distracting you away from the first statement, some people are more likely than others to spot that the first statement is false. Those people are either biology buffs and/or those who remember having been taught in school that crocs are reptiles, not mammals. The ability to recall such information swiftly and apply it in the right context is why Kahneman says that memory is a form of intelligence.

Investment implications

Memory in all its avatars (perception, projection, intelligence) obviously plays a big role in how we invest. Arguably, memory is the basis of how we invest. The fragility of our memories (both in the sense of how quickly they fade and in the sense of how susceptible to manipulation they are) suggests that we need to be careful with how we deal with memories. Four specific steps seem particularly useful to us:

  • 1. We find it useful to write down not just how meetings with management or primary data sources went but also how we perceived particularly good/bad corporate announcements. Similarly, writing down the reasons for buying, selling or avoiding a stock is seems to be a good idea. It helps to create a tangible record which we can come back to years later when our recollection of the event has faded or have been coloured.
  • 2. Buying or selling a stock basis what someone else has told us worries us even if the someone else is the CEO of that company, a reputed analyst or an industry guru. These people are – unintentionally perhaps – profoundly colouring or memories and influencing our perceptions. Hence we are increasingly disinclined to place too much value on meeting the CEO or industry gurus.
  • 3. We find it useful to have a team where members have diverse memories and varied experiences to bank upon. A team in which everybody is a middle aged, male Chartered Account who has grown up in Mumbai or where everybody is a graduate from IIM is likely to have less memories (and hence less intelligence) to draw upon than a more diverse team.
  • 4. In light of what neuroscience is telling us about how the human mind works, the artisanal-skill style of investing where an intelligent, experienced fund manager draws upon her memories and then makes a judgement call on a company seems increasingly vulnerable to criticism. If we want to create a robust investment process which does not wax and wane with our memories of annual reports we have read and companies we have met, we have to rely more on data than our memories/intelligence. That in turn will push all of us – even those who are not quant fund managers – towards using a quantitative framework to drive 80% of the investment process (with the omniscient fund manager’s judgement being the final 20%).


Note: the above material is neither investment research, nor investment advice. Marcellus does not seek payment for or business from this email in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services.

Saurabh Mukherjea is the author of “The Unusual Billionaires” and “Coffee Can Investing: the Low Risk Route to Stupendous Wealth”.

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