The two components of investor intelligence

We can think of intelligence in two components. Both are needed to be an effective trader or investor. First, an intelligent person needs to effectively adapt to an environment. Managing the environment requires resources, so an individual must know how to use them. It requires knowledge about the world and the ability to make decisions. Second, people need to interpret experiences within an environment. The skill to provide meaning and learn. Experiential learning links these two forms of intelligence. 

Intelligence is about adaptation, which may involve low intellect, where success is obtained through limited effort and causal understanding, or high intellect, which is associated with a need to understand the causal structure.

This leads to three forms of intellectual adaptation: rules and heuristics. The second is harder because rules may not work, especially in dynamic environments. The second is imitation, where one actor follows another’s success. The third mechanism is selection, which reproduces attributes associated with prior success and eliminates those associated with failure. Yet, controlling or managing the investment environment is difficult.

Success in controlling an environment is limited because history is complex and stochastically uncertain, and outcomes depend on the sequence of choices that lead to a specific action. Success depends on the sample of experiences and the sample of outcomes. 

Intelligent investing is more than applying models; it is an attempt to control a complex environment that requires understanding, action, and learning.