Sunday, November 12, 2023

Tacit knowledge - the reason for investment decision uniqueness


There is the knowledge you learn and there is the knowledge that is acquired. There is the explicit knowledge that we gain from books and learn from rules and there is tacit knowledge which is gained from experience or is associated with intuition and cannot be easily explained. Tacit knowledge is hard to express or explain and is gained through personal experience and observations. Tacit knowledge is a lens for viewing or explicit knowledge. It can provide a link as well as Bia in our thinking. It is what separates us from others when we make a decision. 

 Some argue that there is a further distinction between explicit and implicit knowledge and then tacit knowledge. Implicit is easy to communicate but difficult to document. We will take a two-part approach of explicit and tacit knowledge as a starting point for discussion. 

The philosopher, Michael Polanyi, who developed this dichotomy, bases his understanding of ‘’tacit knowing’’ on the principle ‘’that we can know more than we can tell.’’ There is knowledge we develop in context or through our set of experiences that is not easy to explain or transfer in the same way as a rule, formula, or book. 


It is important to think about tacit knowledge because it explains why many investors will make different decisions when faced with the same information. Some of the difference in decisions is based on relative difference in risk aversion, but it is also based on our tacit knowledge of how we use our set of experiences to process information. For a quant, differences in tacit knowledge will lead to different models. Tacit knowledge leads to uniqueness.  When investors pick managers, it is often based on the investor's assessment of their tacit knowledge.

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