Finding Alphas, 2nd Edition

3Cutting Losses

By Igor Tulchinsky

Man is a creature that became successful because he was able to make sense of his environment and develop rules more effectively than his natural competitors could. In hunting, agriculture, and, later, mathematics and physics, rules proliferated. Today, rules abound in every area of life, from finance to science, from relationships to self-improvement regimens. Man survives because of rules.

An infinite number of possible rules describe reality, and we are always struggling to discover and refine them. Yet, paradoxically, there is only one rule that governs them all. That rule is: no rule ever works perfectly. I call it the UnRule.

It's an accepted scientific principle that no rule can really be proved – it can only be disproved. Karl Popper, the great Austrian philosopher of science, pointed this out in 1934. He argued that although it is impossible to verify a universal truth, a single counterinstance can disprove it. Popper stressed that because pure facts don't exist, all observations and rules are subjective and theoretical.

There are good reasons for this uncertainty. Reality is complicated. People and their ideas are imperfect. Ideas are expressed as abstractions, in words or symbols. Rules are just metaphorical attempts to bring order to this complex reality. Thus, every rule is flawed and no rule works all the time. No single dogma fully describes the world, but every rule describes some aspect of the world. And every rule works sometimes. ...