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The Map is Not the Territory: Investor Lessons on Failures

Using maps to find our way is great for vacations, but blindly following models in any other field can lead to errors in judgment or thinking. Using the map is not the territory as a mental model is a useful way to think outside of your normal box.

“The map appears to us more real than the land.”

D.H. Lawrence

Think about a map; as a general rule, they are not perfect. They are a reduction of the area they represent if they were full scale, then how could we possibly use them? The reduction is what makes them useful to us. Maps are also snapshots in time, representing visual clues of something that might not exist anymore. An example is looking at maps that were used during Julius Caeser’s march through ancient Gaul, modern France. Landmarks no longer exist; cities mentioned no longer exist. But the maps can provide context and details that help illustrate what the Roman legions endured.

Remember these thoughts, as they help us think and resolve problems.

In today’s post, we will discuss:

  • The Origination of the idea “The Map is Not the Territory.”
  • An Example of The Idea
  • Nassim Taleb and VAR
  • How to Put this Process to Work

The Origination of the Map is Not the Territory

In 1931, Alfred Korzybski presented a paper on mathematical semantics, called “A Non-Aristotelian System and Its Necessity for Rigour in Mathematics and Physics.”

To us, non-technical readers, this might appear to be a bunch of gobbly goob, but the relationship between math and language is important stuff, maybe not necessarily to you and me.

However, in his arguments throughout the paper, he introduced the idea that the map is not the territory. Which, in other words, means that the description of the thing is not the thing itself. Or the model we think is not reality.

And while his paper might not have much practical use to us, it does have enormous implications on our thinking and decision making.

Some ideas from his paper:

  1. A map may have a structure similar or dissimilar to the structure of the territory.
  2. Two similar structures have similar ‘logical’ characteristics. Thus, if in a correct map, Dresden is given as between Paris and Warsaw, a similar relation is found in the actual territory.
  3. A map is not the actual territory.
  4. An ideal map would contain the map of the map, the map of the map of the map, etc., endlessly…We may call this characteristic self-reflexiveness.

To navigate our way, maps are necessary, but they are flawed. Let’s take a moment a define what we mean by a map. In our definition, a map is an abstraction of reality, such as a model, theories, descriptions, etc.

We need abstractions to help guide us, but the problem arises when the map is flawed, or we rely on the map totally to make our decisions.

The mind creates these abstractions to guide us through this complicated world. If our minds thought in a way that each mile represented an actual mile, we would never get anywhere.

The problem we encounter is that frequently we don’t understand the maps fully, or the limits of that map. Often we rely on the abstractions to such a degree that we will stick with an incorrect map as opposed to having no map at all.

Even the best maps or models suffer from limitations or incorrect assumptions.

For example, as Korzybski mentions:

  • The map could be incorrect without us evening realizing it.
  • The map is, by necessity, a reduction of the actual thing, a process in which you lose certain important information.
  • A map needs interpretation, a process that can lead to major issues.

An idea that Charlie Munger has mentioned multiple times. A good idea and our human mind act like the sperm and the egg. Once a good idea gets in, the door closes.

The map is not the territory that is a close cousin of the man with a hammer theory.

When we see a model that works well, the problem we encounter is that we tend to apply it in all situations. When used this way, the model can cause errors in our thinking or judgment.

An Example of How the Map is Not the Territory

There is a great example of how this idea works that I discovered while researching this post, it is from Shane Parrish’s blog, Farnam Street, which I highly, highly encourage you to check out.

By most accounts, Ron Johnson was one the most successful and desirable retail executives by the summer of 2011. Not only was he handpicked by Steve Jobs to build the Apple Stores, a venture which had itself come under major scrutiny – one retort printed in Bloomberg magazine: “I give them two years before they’re turning out the lights on a very painful and expensive mistake” – but he had been credited with playing a major role in turning Target from a K-Mart look-alike into the trendy-but-cheap Tar-zhey by the late 1990s and early 2000s.

Johnson’s success at Apple was not immediate, but it was undeniable. By 2011, Apple stores were by far the most productive in the world on a per-square-foot basis, and had become the envy of the retail world. Their sales figures left Tiffany’s in the dust. The gleaming glass cube on Fifth Avenue became a more popular tourist attraction than the Statue of Liberty. It was a lollapalooza, something beyond ordinary success. And Johnson had led the charge.

With that success, in 2011 Johnson was hired by Bill Ackman, Steven Roth, and other luminaries of the financial world to turn around the dowdy old department store chain JC Penney. The situation of the department store was dour: Between 1992 and 2011, the retail market share held by department stores had declined from 57% to 31%.

Their core position was a no-brainer though. JC Penney had immensely valuable real estate, anchoring malls across the country. Johnson argued that their physical mall position was valuable if for no other reason that people often parked next to them and walked through them to get to the center of the mall. Foot traffic was a given. Because of contracts signed in the ’50s, ’60s, and ’70s, the heyday of the mall building era, rent was also cheap, another major competitive advantage. And unlike some struggling retailers, JC Penney was making (some) money. There was cash in the register to help fund a transformation.

The idea was to take the best ideas from his experience at Apple, great customer service, consistent pricing with no markdowns and markups, immaculate displays, world-class products, and apply them to the department store. Johnson planned to turn the stores into little malls-within-malls. He went as far as comparing the ever-rotating stores-within-a-store to Apple’s “apps.” Such a model would keep the store constantly fresh, and avoid the creeping staleness of retail.

Johnson pitched his idea to shareholders in a series of trendy New York City meetings reminiscent of Steve Jobs’ annual “But wait, there’s more!” product launches at Apple. He was persuasive: JC Penney’s stock price went from $26 in the summer of 2011 to $42 in early 2012 on the strength of the pitch.

The idea failed almost immediately. His new pricing model (eliminating discounting) was a flop. The coupon-hunters rebelled. Much of his new product was deemed too trendy. His new store model was wildly expensive for a middling department store chain – including operating losses purposefully endured, he’d spent several billion dollars trying to effect the physical transformation of the stores. JC Penney customers had no idea what was going on, and by 2013, Johnson was sacked. The stock price sank into the single digits, where it remains two years later.

What went wrong in the quest to build America’s Favorite Store? It turned out that Johnson was using a map of Tulsa to navigate Tuscaloosa. Apple’s products, customers, and history had far too little in common with JC Penney’s. Apple had a rabid, young, affluent fan-base before they built stores; JC Penney’s was not associated with youth or affluence. Apple had shiny products, and needed a shiny store; JC Penney was known for its affordable sweaters. Apple had never relied on discounting in the first place; JC Penney was taking away discounts given prior, triggering massive deprival super-reaction.”

The above story is the perfect illustration of the map is not the territory problem. The problem was not with Johnson’s thinking or ability, not even close. The problem lay in the model he was using to form his thoughts; the model had changed from Apple to JC Penney, and he had not adapted to that idea.

This idea is prevalent around history over the years. A couple of ideas that spring to mind are the Roman defeat by the Parthians during the times of Julius Caeser.

One of the leading aristocrats of the time Marcus Crassus, at the time the richest man in the world, fancied himself a military genius on par with Caesar. In his vanity, he decided to build an army of his own and march in Parthia, a region in the middle east that was particularly troublesome to the Romans.

The problem with Crassus’s decision is that he marched in there with the idea that his legions would crush this nation without much effort, as the Romans looked down on these people. One of the first issues is that he stretched out his supply lines over many miles, which exposed the Romans to attack. It also slowed down the progress of the legions and allowed the Parthians to prepare for the upcoming battle.

Unbeknownst to Crassus, the Parthians fought in a style that was not compatible with the Roman style of close-order fighting, of which the Romans were superior. Rather the Parthians fought on horseback and used a style of the speed of attack and retreat that the Romans were ill-prepared.

What ensued when the Parthians did attack was a complete failure of the Roman system and complete annihilation of the Roman forces, including the capture of Crassus, who was soon killed. Along with the failure of Crassus’s army to adapt to the style of battle, he also never bothered to scout ahead to understand the geography of the land to prepare for the upcoming battle.

Another example from history is the horrendous casualties suffered during World War One. At the time of the war, most generals still operated under the Napoleonic code of massing your troops together and marching them at a specific point and overwhelming them with numbers.

But weapons had evolved much faster than the models used at the time to fight wars. With the development of machine guns, for example, the ability of fewer men to defend an area greatly increased while the death rate exploded.

At the beginning of the war, and to some extent throughout the war, Tactics dictated that you mass your troops along a small corridor and then have them charge right at the enemy at the smallest point. With the improvements in weaponry, these tactics spelled suicide for any foot soldier attempting this style of attack. And in fact, World War One was a meat grinder, and many millions lost their lives because the generals refused to change their models.

The question to ask, were all of these leaders incompetent? Not at all, but their failure was to adapt their thinking to the current circumstances and instead to rely upon old maps in their heads.

Nassim Taleb and VAR

One author particularly familiar with the idea of models and problems inherent in the blind following of said models is Nassim Taleb.

Taleb is the author of the Incerto series – Antifragile, The Black Swan, Fooled by Randomness, The Bed of Procrustes, and Skin in the Game. If you are interested in improving your process of thinking, all books in this series are illuminating. Beware, they are not for the faint-hearted, as they are dense and not light reading.

Taleb has been quite vocal about the misuse of models for years, just follow him on Twitter and you will see that daily. But his first model to target was the Value-at-Risk or VAR model.

The VAR model is a banking community model that was created to help manage risk by providing the maximum allowance for losses depending on a confidence level, with the higher the level, the less accurate the model.

Elaborate statistical models were built to support the VAR theory, and I won’t go into all the financial wizardry that was used to create this model. The problem as Taleb saw it was:

“A model might show you some risks, but not the risks of using it. Moreover, models are built on a finite set of parameters, while reality affords us infinite sources of risks.”

Financial markets don’t operate with any degree of confidence in the ability to predict the future. Relying on models, with their standard of deviations can lead to the belief that random events will never occur and a failure to consider them.

One of Taleb’s most vocal points is that the day before the “worst-case” event would occur, you would not have the “worst-case” as your worst case.

For example, on September 10, 2001, no one in the world could have predicted what was to come the next day and the toll it would take on the lives of those directly involved. Additionally, no one on Wall Street could have predicted the fall of the markets the following day.

On September 10, what would the models have predicted as the worst day? I would hazard nothing like what occurred on 9/11.

The same idea would apply to the current pandemic and the lockdown of the world to combat the virus. The economic meltdown that is occurring I would bet is on no one’s models.

Before the mortgage crisis of 2007, home values “always” went up, and that backward-looking, trend-following model was laid to rest after that event.

So, how can we put this thinking to use?

How to Put This Process to Use

When thinking, we will do ourselves a favor by using simpler models. Albert Einstein likes to say that you should make things as simple as you can, but no simpler.

Complicated models for complication’s sake is not what we need to be after.

In today’s age of technology, we can rely on it too much. We confuse models for reality, and in some cases, we believe that the excel spreadsheet is alive and can predict all.

The discussions around models have increased in recent months with the reliance on them to predict the curve of the coronavirus. Many of the models have been wrong, in some cases, quite wrong. But we have doggedly stuck to those models to predict the future, and based all actions on those models.

Reality doesn’t often work that way, and neither does life.

How do we do better and improve our models?

The first step is to realize that we cannot fully understand a map, model, or abstraction until we can understand and respect its limitations.

We need to distance ourselves from the reliance on the map and realize what context the map is helpful, and where the boundaries lie.

An example is the use of discounted cash flow models to value companies. The DCF model requires lots of assumptions about the company and prospects, which can be reasonably adjusted. But one of the limitations is that if a company is losing money, it is hard to utilize, also because of the nature of financials like banks, it is not as useful.

But if you blindly use a DCF to value every company you find, you can set yourself up for failure.

A better approach would be to use the DCF, where it would benefit you the most and find other models that would fit those other opportunities, whether they be distressed companies or financials.

Final Thoughts

In our continuing series on mental models, the map is not the territory that helps explain our use of models and abstractions as a way to make decisions.

Using these models in and of themselves is not harmful; the problems lie in not truly understanding the limitations that each model presents. Approaching each problem like it is a nail, and you have the hammer that can lead to errors in judgment.

Better to have built up many models to help you make decisions and continue to expand upon those models. History and finance are littered with examples of how humans failed to adapt their models, and the results that became of them illustrate that pain.

Discovering other ideas from science, history, math, physics, and so on can help you broaden your maps, and give you a sense of boundaries and limitations of those maps. That is one of the keys to success.

One of the joys of life is discovering something new and finding out how it can improve your life, and it is an ongoing process that “all” of us will continue for as long as we live.

Thank you as always for taking the time to read this post. I hope you find something of value for your investing journey.

If I can be of any further assistance, please don’t hesitate to reach out.

Until next time.

Take care and be safe out there,

Dave