Fisher Investments Press: 20/20 Money: The Virtues of Heuristics

This chapter is, at its core, about heuristics. Sometimes colloquially called a "rule of thumb," a heuristic is a method used to help solve a problem or facilitate learning. Fisher Investments Press author Michael Hanson believes one of the most important features about heuristics is that they’re "loose," which means they are not meant to be rigid rules but guidelines to point us in the right direction. This is a very human idea—it's like a shortcut so we don't have to try to remember every single thing we've learned each time we are confronted with a problem to solve.

But Fisher Investments Press author Michael Hanson believes we must exercise caution on two fronts with heuristics. One, we need to be careful about confusing heuristics with reductionism. Recall from Chapter 1, reduction is the process of taking a big problem and cutting into smaller, easily solved problems with the assumption that all the smaller solutions can be put back together again to solve the big problem. Our example was a car, where the motor can be taken out, fixed, and then put right back in and the system will work just fine. A good heuristic shouldn’t seek to reduce a problem but instead allow it to be more freely and easily solved.

Second, always reserve the right to say a certain heuristic is not appropriate in a situation. That's the "loose" feature of heuristics, where we can decide it simply doesn't apply to the problem at hand. Disciplined investing is not the absence of heuristics—we need them. Rather, Fisher Investments Press author Michael Hanson believes we should be mindfully blending rigor and rules of thumb to reflect substantial self-awareness and self-discipline in thinking.