Flying a “Foil in the Flow” above the “Walled Gardens”
Post #8 out of 9: Conclusion
Preamble for New Substack Readers
This eighth post continues a series of nine weekly posts that add up to a final CTRI Notebook. Each post covers a section from this final Notebook titled “From Rational Investors, Inc. to the Curve, Triangle & Rectangle Institute, a 25-year Story of Change in a Hard-to-Change Industry, and What May Come Next”. This Notebook summarizes the author’s Fintech perspective on the history of retirement planning (advisor-tech) over the last 25 years, and projects its future over the next 25 years.
The ninth post will mark the last step in the dissolution of CTRI, and the possible placement of its IP in the Public Domain should no other not-for-profit organization want to actively continue the development of the “Constructive Skepticism” Curriculum. The placement of CTRI’s IP, the “Constructive Skepticism” Curriculum, in the Public Domain would make it passively available to any and all, and thus remain a match with its “Meaning” and “Purpose” to help financial clients, advisors, and executives improve their individual, business, and investment decision-making by evolving the basis for their “Predictions” from “Trust Them”, to “Show Me”, and to “See for Yourself”.
One way or the other, CTRI’s founders hope that this IP will continue to help readers answer questions such as: What new ideas will inject themselves into the culture? How will these new ideas change the nature of your “Ideal Client” over the next 25 years? What do you need to know about such ideas, and their impact on your “Ideal Client” in order to remain a “Productive Host” in this evolving Fintech ecosystem? What can you do now, or did not do earlier, that will shape your future, and the future of your clients in this new environment?
Post #8 out of 9: Conclusion
This conclusion starts with a recap of what we set to show with this final Notebook titled “From Rational Investors, Inc. to the Curve, Triangle & Rectangle Institute, a 25-year Story of Change in a Hard-to-Change Industry, and What May Come Next” as summarized by the Abstract (Post #1 out of 9)
Abstract (Redux)
This Notebook in nine sections, and published at the rate of one section per week on Substack summarizes CTRI’s work to mark the completion of CTRI’s dissolution, and the possible placement of its IP in the Public Domain. Placing this IP, called the “Constructive Skepticism” Curriculum, in the Public Domain would make it passively available to any and all, and thus remain a match with its “Meaning” and “Purpose” to help financial clients, advisors, and executives make better “Predictions” by evolving the basis for their “Predictions” from “Trust Them”, to “Show Me”, and to “See for Yourself”. Readers pressed for time, and that cannot read the full Notebook can read this Abstract, or the Conclusion which is presented in the form of memorable one-liners that summarize the key take-aways from the Notebook. Note that terms in “Italics” refer to definitions in the Glossary of “Constructive Skepticism” available on Substack.
This Notebook presents a 25-year history of change in a hard-to-change industry, the Financial Industry. Additionally, it makes predictions about the next 25 years. This history of change maps the evolution of retirement planning since 1999, and articulates important milestones with recent examples that include Mike Zwecher’s 2010 book, and Thomas Idzorek & Paul Kaplan’s 2024 monograph.
Additionally, this Notebook makes use of the “Constructive Skepticism” Curriculum to identify foundational issues, and to predict practical solutions when prevailing “Models” no longer provide a good-enough fit with reality. Reality changes constantly, and the lack of fitness of prevailing “Models” can happen slowly at first, and then all of a sudden, as experienced by the author in the early 2000s when the retirement wave of 10,000 Boomers per day pressured the financial industry to see that siloed models did not provide good-enough solutions for what became a critical mass of new “Ideal Clients”.
This retirement wave favored solutions that worked across the business silos, and the provision of retirement planning services from a holistic perspective. Thus, the bottom-line of this 25-year history of change can be summarized as “Retirement, Procedural Prudence, and the Household Balance Sheet (HHBS)”: Acknowledging the differences between investment planning and retirement planning, seeing “Procedural Prudence” as a scalable method across the industry’s silos, and using the HHBS as a holistic implementation tool were novel ideas in the early 2000s.
Starting in 2017, CTRI focused on reading research papers about Health, Wealth, and Statistics in order to separate “Spinach” from productive ideas. This reading of research papers turned into a formalized process, The Template for Reading Research Papers available on Amazon, and a curriculum, the “Constructive Skepticism” Curriculum, available on Substack. “Spinach” refers to things we think unquestionably true but look ambiguously false after asking a few questions: For example, “Spinach” is not high in iron, and Popeye, the Iron Man did not each “Spinach” for its iron but for its vitamin A. Initially, “Spinach” in research papers felt like it should be the exception. Over time, it became clear that “Spinach” may be the rule. Research papers present mental maps and “Models” subject to specific. “Axioms, Assumptions & Hypotheses”. Many “Models” found in research papers look like caricatures because their assumptions that look like amputations. Some “Models” look like productive mental maps for decision-making. This Notebook highlights some of the productive “Models” and mental maps that CTRI found along the way of reading research Health, Wealth, and Statistics.
Finally, this Notebook addresses the continuing evolution of retirement planning solutions, and future growth areas in the financial industry including expectations that (i) the aging Boomers’ retirement wave will soon morph into generational wealth transfer, and that, pressured by the regulatory contradictions between their statutory agencies as illustrated by the example of annuities in 401(k) plans discussed during CTRI’s last member conference on September 22, 2024 , financial solutions will move away from the Boomers’ “View Across the Silos” to become siloed again, perhaps in the form of individualized collections of risk-specific “applets” derived from household balance sheet analysis, (ii) advisors, and clients will embrace “Terrain” perspectives, such as the household balance sheet, that recognize, and manage the presence, and position of risk-specific “Absorbing Barriers” as a counter-balance to the traditional focus on portfolio optimization and (iii) Advisors and clients will recognize the existential differences in “Meaning” between the ‘Ensemble” perspective of the Disinterested Observer (i.e. Academics and Institutions), and the “Time Average” perspective of the Decision-Maker (i.e. Individual Clients and their Advisors).
In the last 25 years, we may have lived through a wave of unfreezing of the industry’s “Walled Gardens”. In the next 25 years the walls may be freezing again, and profitable growth will become siloed again, but in the context of the household balance sheet, and a few other and, similarly productive models that can improve our “Predictions”.
Conclusion
This conclusion highlights some of the ideas in the Notebook as we move from 25 years of a “View Across the Silos” defined by the rising wave of retiring Boomers, to the next 25 years that may be defined by the rising towers of the “Walled Gardens”. This recap uses the sub-headings of the content sections of the Notebook to highlight these ideas. The rising wave of retiring Boomers provided a stable feature of the retirement planning ecosystem for 25 years, it may not continue to provide such a stable feature for the next 25 years as Boomers shift from retirement to wealth transfer. Additionally, implicit trust in research results provided a stable feature of the greater culture surrounding investment management, and retirement planning. However, the painful experience of “Willful Blindness, Error & Deceit” by a critical mass of people, and in many “Domains of Knowledge” (e.g. non-reproducibility, and non-replicability of research results) further illustrated by CTRI’s documentation of the prevalence of “Spinach” in Health, Wealth & Statistics research papers suggest that trust in research results may not remain such a stable feature for the next 25 years.
Reviewing the Notebook section by section to form conclusions starts with the “Introduction”. The “Introduction” described the curiosity and motivation behind the creation of CTRI, and the realization that what should be an exception in order to make good decisions from research results (i.e. “Spinach”) looks like the rule, thus making it necessary to use “Tools, Checklists & Processes” such as the Template for Reading Research Papers to make good individual, business, and investment decisions. The sub-headings of the “Introduction” tell the story as follows:
- Riding the Wave of Boomer Retirement
- Spinach is not rich in iron
- Looking for “Spinach” in research papers
The first content section, titled “Models Reduce Reality to a Map of Lower Dimension” starts the Notebook by creating a shared context for the use of the word “Model”. Making good decisions means making good “Predictions” based on individual mental maps and “Models”. Decision-making based on mental maps and “Model” makes the structural presence of “Spinach” in research papers more understandable. It also provides us with the means to build “Tools, Checklists & Processes” to deal with the “Discontinuities” that take place when our mental maps and “Models” fail to create good “Predictions”. What mental maps, and “Models” govern our decision-making? How stable are they in the presence of questions? How do you change your mind? The sub-headings of this first content section tell the story as follows:
- “Brains” exist to manage “Motions” with “Predictions”
- The Map is not the Territory
- Continuity, Discontinuity, New Continuity
The second content section, titled “The Reducing Assumptions Behind Financial Models” continues the development of the contextual framework of the Notebook with a description of the assumptions that support the valid use of quantitative “Models” in Financial Economics. This section moves this examination of the “Tools, Checklists & Processes” to make good individual, business, and investment decisions with research results from the qualitative, to the quantitative, and shows that such quantification does not remove the structural presence of both “Spinach”, and “Willful Ignorance, Error & Deceit”. What questions about the “Axioms, Assumptions & Hypotheses” that support the valid use of research results are likely to create sudden changes in “Perspectives”, and understanding? The sub-headings of this second content section tell the story as follows:
- The “Feet of Clay” of “Axioms, Assumptions & Hypotheses”
- Turtles, thus “Models”, all the way down
- Slowly, then all of a Sudden
The first two content sections provided a framework to support the development of the next three sections, starting with this third content section, titled “Models for Ideal Investment Clients and Models for Ideal Retirement Clients”. This section presents the evolution of retirement planning best-practices over the last 25 years, and illustrates key aspects of this evolution with reviews of Zwecher (2010) as well as Idzorek/Kaplan(2024). These book-length research papers show the central, and lasting role of the household balance sheet in both retirement planning, and investment management. Additionally, they show the different “Perspectives” that one can take when using the household balance sheet for financial planning (i.e. focusing the analysis on the protected “Floor”, or focusing the analysis on “Risk Capacity” as a first-order proxy for the growth portfolio . This section supports the first of three “Predictions” made in this Notebook: (i) The aging Boomers’ retirement wave will soon morph into generational wealth transfer, and that, pressured by the regulatory contradictions between their statutory agencies as illustrated by the example of annuities in 401(k) plans discussed during CTRI’s last member conference on September 22, 2024 , financial solutions will move away from the Boomers’ “View Across the Silos” to become siloed again, perhaps in the form of individualized collections of risk-specific “applets” derived from household balance sheet analysis. The sub-headings of this third content section tell the story as follows:
- What “Ideal Client” Defines this Solution?
- The Dose is the Poison: The Emergence of Risk Capacity in Retirement Planning
- You Can Only Keep What You Can Defend
The fourth content section, titled “Ecosystems Harbor the Means of their Own Disassembly” takes a Fintech start-up “Perspective” developed empirically over the last 40 years. Namely, start-ups live in a limited flow of time, and energy. How can we harvest this flow to make good decisions in order to create successful outcomes? What ecosystem participants surround us, support us, or hinder us in this effort? How can we “Fly like a Foil” in these flows in order to avoid hitting the “Absorbing Barriers” that create “Game Over” conditions? This section supports the second of three “Predictions” made in this Notebook: (ii) Advisors, and clients will embrace “Terrain” perspectives, such as the household balance sheet, that recognize, and manage the presence, and position of risk-specific “Absorbing Barriers” as a counter-balance to the traditional focus on portfolio optimization. The sub-headings of this fourth content section tell the story as follows:
- Ecosystems Harbor the Means of their Own Disassembly
- Fly above the “Walled Gardens”
- Fly like a Foil in the Flow
The fifth, and final content section, titled “The Ergodic “Ideal Client” for Investment Client and the Non-Ergodic Client for Retirement Planning” shifts the discussion from general, and qualitative “Perspectives” to questioning one of the specific “Axioms, Assumptions & Hypotheses” that support the valid use of quantitative “Models” in Financial Economics: The “Ergodic Hypothesis”. This examination, started by Ole Peters, brings up, and answers critical questions about the “Meaning” of modelled results, and recommendations. What do the numbers derived from “Models” mean for the people who create them, and the people who use them to make decisions? This section supports the third of three “Predictions” made in this Notebook: (iii) Advisors and clients will recognize the existential differences in “Meaning” between the ‘Ensemble” perspective of the Disinterested Observer (i.e. Academics and Institutions), and the “Time Average” perspective of the Decision-Maker (i.e. Individual Clients and their Advisors). The sub-headings of this fifth, and final content section tell the story as follows:
- Ergodicity Economics Benefits the Individual Client and their Advisors
- The “Ensemble Average” of Periodic Returns Represents the Outcome of the Casino
- What is the Offer to the Individual Client?
The next, and final section in this Notebook provides “Annotated References” that extend the readers’ access from the “Tools, Checklists & Processes” of the “Constructive Skepticism” Curriculum (such as the Template for Reading Research Papers) to the books, and papers that provided the grist for its mosaic of mental maps, and “Models”. These curated, and annotated references will help readers “See for Yourself” in order to make “Predictions” above and beyond what they can achieve with the “Trust Them”, and “Show Me” approaches to decision-making. As we move from the rising wave of Boomer retirement of the last 25 years to the rising towers of the financial industry’s “Walled Gardens” recognizing the “Good Story” of the “Ensemble” vs. the “Real Story” for the individual will become increasingly important in making good personal, business, and investment decisions.