The “green lumber fallacy”

What do we need to know to make decisions? It turns out we might often be very wrong about the data we actually need in order to have success.

The term “green lumber fallacy” is a term coined by the investor & philosopher Nassim N. Taleb and it describes the story of a very successful trades who bought and then sold green lumber. He made a fortune trading it, yet as it turned out – he had no idea of what he was trading. He thought that ‘green lumber’ meant wood painted green. Yet, he later found out that it was actually freshly cut lumber.

The moral of the story is that, in order to make successful investment decisions, you don’t need to know the product. When you trade with oil, there’s no need to know the politics of middle-east or the history of Iraq. It’s because they’re entirely different areas. Would you be great at politics if you know about investing? You could, but you could also not. E.g., would you bee good at math if you’re good in history? Again, you could be, but you could also not be.

Many people would take the investors as an idiot if they didn’t know that he made a lot of money nevertheless. And even then, many would think he was lucky. Which, of course, could also be the case. But the point remains.

So, be careful of others claiming to know what they’re talking about just because they know about a related field. We need to be also wary of ourselves – we might not know what we’re doing even though we think we do. Just because you have a degree in computer science, doesn’t mean you know about front-end development. Just because you know wedding photography, doesn’t mean you know about street photography and vice versa.

Of course, knowledge of other fields can help. Obviously, knowing how to make photographs, helps you in any form of photography, but a distinction needs to be made: are you successful in your field because of ‘that’ or in spite of?

KRISTJAN