When cool November evenings descend upon my New England home, I move my thinking inside. The flickers of an early fall fire warm my face. I have whiskey at my side and Whiskey at my feet.
My mind drifts. I nod off, but only for an instant. I think about some old dusty theory I held around work. In the investment business, we create theories all the time. We use theories as tools to improve our investment decisions.
People at one point thought the earth was flat. That’s what they say at least. Seems crazy. That theory held up until someone sailed off in one direction and showed up in the other. The earth-is-flat theory was thereby proven wrong. Some clever person came up with a new theory about the earth being round.
That’s weird. We actually got a little closer to the underlying truth by disproving the earth-is-flat theory. We learned something about the world around us.
Albert Einstein came up with his theory of relativity because he observed data that didn’t fit existing theories. The results of experiments conducted by a fellow physicist, Max Planck, were inconsistent with Newtonian physics, which had existed uncontested for nearly three centuries. Einstein knew something was wrong. Existing theories didn’t explain the new incoming data. He came up with new theories that better matched the observed data.
Oddly enough, we learn about the world around us not by proving existing theories correct, but by proving them wrong. We learned something when the earth-is-flat theory was debunked. We learned something when Newton’s theories were incapable of explaining incoming observations.
In the absence of inconsistent data, there would be no theory of relativity. Why would there be? There would be nothing to explain. Einstein would have been just another patent clerk. Incoming data that is inconsistent with existing theories change the game.
Karl Popper in all likelihood thought about theories more than anyone in history. He drilled down on the topic for decades. He literally made a career of it. He used the term “falsification” for a situation where one theory is disproven by incoming data. It is the act of falsification that triggers the creation of new knowledge. Falsification, according to Popper, is the way we learn and make progress about our world.
Popper himself warned us about the dangers of being overconfident in the accuracy of our theories. He said, “No theory should ever be relied upon as the final truth”.
Theories are just theories; they are not the underlying truth. Even if by chance we created a theory that perfectly explained the underlying truth, we could never prove that we had done so because we can’t observe the underlying truth directly. We don’t have access to the rule book. We only see hints of the underlying truth.
That is what makes falsification such a game changer. While we can never prove with certainty that a particular theory is true, we can compare two theories and determine which one lies closer to the truth. We do that through falsification. We know one theory explains the underlying truth better than another if we can somehow falsify one of the theories.
One data point is all it takes to falsify an existing theory. One guy sailing around the world. One experiment. One observation. We know the earth-is-round theory comes closer to the truth than the earth-is-flat theory because the latter has been falsified, to use Popper’s term, through the observation of some event that doesn’t fit the earth-is-flat theory. That one falsifying observation is the springboard to a new and improved theory.
Knowledge, then, progresses through the falsification of one theory and the creation of a new one. Finding falsifying data is a key enabler. That goes for anyone who uses theories to better explain our world: scientists, economists, investors. Knowledge grows and compounds only if we proactively look for falsifying data. Only then can we develop new theories. Falsification is our friend.
My head bobs forward. Whiskey nestles closer to my feet and perks his ears. The earth is flat? Einstein? Wow. I must have nodded off longer than I thought.
