Archibald Hill just wanted to know how fast he could run.
He ran every morning, on a track before breakfast. Some days it was fast and effortless. On others his “stiffness and exhaustion” made him question how his body worked.
Hill began studying his own capacity for exercise. It eventually made him one of the top biophysicists in the world.
He and his colleagues spent months sprinting around a track, measuring their oxygen consumption and muscle fatigue and its connection to endurance. Hill wanted to know his ceiling – the point at which consuming more oxygen did nothing for his ability to run. His calculations were accurate at predicting his best run times around the track. “Our bodies are machines, whose energy expenditures may be closely measured,” he wrote in 1926. Hill’s discovery earned him the Nobel Prize in Medicine.
But there was a kicker. As accurate as his calculations were in the lab, they were of little use in predicting athletic competitions.
You could take a group of athletes, measure their oxygen intake and lactic acid buildup, and in theory determine who had the best “machine.” Sometimes, in a controlled setting, results matched predictions. But in races – especially long, stressful, high-profile races – the predictions broke down. Subpar “machines” could beat the top athletes in ways that didn’t make sense. Athletes who, in theory, could deliver a certain performance – a long distance run at a certain pace – gave up well before predicted.
Hill wasn’t in denial. Once asked what use his calculations had, he responded: “To tell you the truth, we don’t do it because it is useful, but because it’s amusing.”
That was an exaggeration. There are limits to human performance, and Hill discovered them before anyone else.
But he uncovered, by accident, something else: Athletic performance isn’t just what you’re physically capable of. It’s what you’re capable of within the context of what your brain is willing to endure at a given moment’s risk and reward.
Your brain’s first job is to make sure you don’t die. So like a speed governor on a car, it won’t let you exert true maximum performance – the kind of thing that could leave you exhausted to the point of being vulnerable – unless the stakes are high enough. It will shut you down at a lower physical “limit” if the risk of exertion isn’t worth the reward. Physical running limits on a test track may be different than physical limits during an Olympic final, which may be different than physical limits when being chased by a murderer. This helps explain crazy stories about people lifting up cars when someone’s life is in jeopardy. Capabilities are a function of in-the-moment circumstances.
“There is more in athletics than sheer chemistry,” Hill wrote. You never know how an athlete can perform until you put them in the heat of moment, with the pressures, risks, humiliations, and incentives of real-world conditions that can’t be emulated in the laboratory.
In an interesting coincidence, Archibald Hill was married to John Maynard Keynes’ sister. Keynes had discovered for economics the same thing Hill discovered for physiology: It’s difficult to measure today how something will perform tomorrow, because both people and economies are not pure machines. They have souls. And in the real world, souls drive performance in ways you’d never imagine in the classroom. Hill called it “moral factors”. Keynes called it “animal spirits.” Both can be summarized as, “People in the wild are different from people on paper. Study accordingly”
Willie Sutton, the famous bank robber, once described his attempt to become a lawyer in the 1920s:
The customary way to become a lawyer was to apprentice yourself to a practicing lawyer, read law on your own, and learn about trial work by carrying the old man’s bag into court. The old-timers will tell you that while the apprentice system didn’t turn out particularly good book lawyers, it produced trial lawyers far superior to those you have today.
What I love about this is acknowledging that book and real-world knowledge have both upsides and downsides. Neither is necessarily better than the other.
Book knowledge is the study of how something either should work, or has historically worked, when viewed in a lab or observed within a big, average group. It’s very useful because it lets us see the patterns that aren’t always intuitive in your day-to-day life. Formulas, data, hard science.
Real-world knowledge is the study, often learned subconsciously, of things that book knowledge either hasn’t figured out yet, or is too nuanced to summarize on paper. The hidden subtleties of psychology, preference, sociology, politics.
Book knowledge without real-world knowledge is dangerous because it’s blind to the context of people’s lives. You can state that assets with more volatility tend to produce greater returns, and you would be by-the-books right. What you’d miss is the real-world knowledge that higher volatility causes you, your spouse, and your co-workers to question what the hell you’re doing when you lose half your money – so much so that you may give up on a volatile asset, forgoing its superior long-term returns. It’s hard to measure the effect of a spouse’s glare in an academic white paper.
Real-world knowledge without book knowledge is dangerous because it’s blind to the counterintuitive drivers of the world. You could assume that a long period of economic or market stability is a sign of enduring strength. That makes sense in the real world. But there’s a long history of stability making people complacent, complacency leading to oblivious risk-taking, and oblivious risk-taking leading to instability – and most people sitting bewildered when it happens. You have to study the long history of bubbles, with charts and data, to wrap your head around it.
Daniel Kahneman pioneered research on how people think about risk and loss. “Loss aversion” – a tendency to avoid loss with more enthusiasm than equivalent gains – was a major discovery. A valuable discovery. But it has to be paired with other real-world knowledge. What else are people thinking about when you ask them about loss? What else is going on in their lives that could affect how they think? Hard to measure that stuff in a lab. Nassim Taleb writes:
Ask a subject how much he would pay to insure a 1% probability of losing $100 … You are trying to figure out how much he is “overpaying” for “loss aversion” … But you cannot possibly ignore all the other present and future financial risks he will be taking. You need to figure out other risks in the real world: if he has a car outside that can be scratched, if he has a financial portfolio that can lose money, if he has a bakery that may risk a fine, if he has a child in college who may cost unexpectedly more, if he can be laid off. All these risks add up and the attitude of the subject reflects them all.
I don’t know whether I’d agree with Kahneman’s discovery or Taleb’s rebuttal. But do I have to? One is academic knowledge, the other is real-world logic. Both of those things can work together to get you closer to the truth.
There’s the saying, “The student knows the rules, the master knows the exceptions.” As a corollary, the books know the truth, the real-world knows the nuance.
A couple things that help that process:
Learn the rules but then spend as much time observing how people use and abuse those rules. Most investing tragedies are caused by good, useful rules being taken too seriously. Value investors truly baffled at why shorting Netflix four years ago didn’t work, or economists dumbfounded at why Fed policy didn’t lead to hyperinflation, and neither group willing to admit they’ve been wrong. The guys at LTCM believed in their (mostly true) rules so much they closed their eyes, held the rules to their chest, and ran as fast as they could towards a cliff. Watching people behave with rules can be important as the rules themselves.
Read outside of your field. Why would an investor read about medicine? Or watch a military history documentary? Or study evolution? Not for the specific academic facts of those fields. No use there. But expanding the boundaries of what you read and think about offers a glimpse into to how people operate in the real world. How people respond to incentives, think about risk, and deal with surprises. Real-world stuff that’s often hard to quantify into an academic formula or argument, but helps you better understand how people behave in the wild.
“The chemist and the poet are both right, the biologist and the saint,” Hill once wrote. “Each must pull up now and then to find where he is going and to adjust his spectacles.” Good advice.