Why do Engineers Think They’ll Be Good at Picking Stocks?

I’ve met a lot of engineers who have become fascinated with investing in the stock market. Except it’s usually not straightforward index investing (which is probably the main thing non-professionals should be investing in) but something convoluted involving a lot of math, options and stock picking.

Anyone who studies finance or economics probably understands why this is a bad idea. Stock prices may not be perfect, but they at least approximate their true value. Whenever someone realizes a stock is underpriced, they try to buy it, thus bidding up the price.

Why do I have so many friends in STEM-related field that ignore this basic fact? There are a few explanations, but my favorite is this: engineering rewards intelligence. A smart engineer, who understands the system, can do a lot more than one who doesn’t. Because of this, engineers naturally develop the assumption that the more they learn about a system, the better their results will be.

Economists, on the other hand, tend to form a different assumption about reality. They see how millions of different participants all influence stock prices and therefore see how it becomes increasingly difficult to beat the market reliably. A “dumb” strategy of simple index investing may outperform one that requires more intelligence.

Do More Logicians Believe in God than Biologists?

If you’ll allow me to continue down the rabbit hole of anecdotal evidence and wild speculation, here’s another: mathematicians who study logic are more likely to believe in God than biologists do.

The famous mathematician and logician Kurt Gödel was a convinced theist. Same for George Cantor. Richard Dawkins is perhaps more famous now for his atheism than his work in evolutionary biology. Charles Darwin’s beliefs about God are less clear, but his views definitely leaned more in that direction than his peers of the time.

Why the difference?

I think it, again, comes down to the intuitions about reality you pick up from studying one aspect of it. Logicians deal with infinities and paradoxes, where things may be fundamentally unknowable and mysterious. Biologists see how fantastical living systems work mechanically and chemically, undermining a belief in the supernatural.

Assumptions and Mental Tools

Engineers think they can pick stocks because they’re used to looking at systems that, with intelligence and correct understanding, can be manipulated to their advantage. Economists think they can’t pick stocks because the very act of manipulating the system self-corrects.

Logicians believe in God because they see mystery in banal symbols. Biologists don’t because they see banal chemistry and physics in the mysteries of life.

Learning about a field creates unstated assumptions about how the world works. These assumptions are tools, when applied correctly. But they can also break down when misapplied.

I see two ways to combat this:

First, learn more from other fields, not related to your own. Even if you don’t become an expert, trying to understand why most the people across certain disciplines have eerily similar world views will help you understand what assumptions learning in that field tends to train.

Second, respect the assumptions of people closer to the topic at hand, even if their field is less prestigious than yours.

  • Robb Seaton

    My take on the whole mathematician-theist thing: most people who go on to study mathematics instead of, say, physics are not that interested in reality to begin with.

    That is, I’m less inclined to believe logicians become theists by studying logic, but instead were predisposed to be theists to begin with, concomitant with their predisposition to study logic.

    It takes a very special sort of personality profile for one to decide to dedicate their life to stuffing abstractions disconnected from the real world into their head.

    OTOH, I agree that the study of biology probably does convert people to atheism, for the reasons you mention.

  • Matt

    A few other points I’d make about the stock market: as a small, individual investor, I think it’s unlikely that your actions will move stock prices significantly. Much more compelling reasons not to trade actively by yourself would be transaction costs, which will eat away at any gain you make, and if you do find a strategy that produces significant returns, it’s unlikely to continue to work for a long time. Perhaps that is another trap engineer-minded people fall in to – if you ‘solve’ a system in that domain, the solution remains valid forever.

  • Jonathan

    Excellent theory as to why certain professions persuade thinking in other fields. To Robb’s comment above, it’s certainly true that predisposition would influence one’s field of study, but that doesn’t negate why engineers would later then think they are good at picking stocks, or why later a logician would hold steady to a belief in God. The interesting aspect to this article, which I think Scott rightly points out here, is how expertise in one field can lead to biased thinking in another field- and to an extent, the respective field of study predicts the biases.

  • Sebastian Aiden Daniels

    I find that interesting about the difference between the top people in the field of logicians and biology. I wonder how it spreads out across the rest of the people in the said fields.

    The stock market is an unstable beast. I can see why engineers think they can become confident in their ability to pick stocks, but I think it is hazardous because like you said even the most noteworthy economists understand how unstable things are.

    I prefer to stick with one day fantasy sports leagues that I pick based off of statistical analysis. Also unstable to a large degree too.

  • Evan

    The financial markets are much more complex than anything that can be encountered in engineering. I worked at a leading hedge fund in Toronto and rarely saw engineers being successful. Most have too much interest in math and not enough interest in learning the underlying businesses/industry…Carl Icahn, Bill Ackman, etc don´t concern themselves with complex formulas…but they have been reading about companies and industries for decades which provides an often insurmountable barrier to overcome and I think this is why engineers often turn to their already learned math skills…lots of evidence of engineer/math geeks blowing up the system…Long Term Capital Mgmt is one example…the debt rating agencies is another…the belief in efficient market hypothesis is another problem driven by academia that has no application in reality…the people that do the best sit on their ass and read day after day, year after year…no real shortcut.

  • Scott Young

    Evan,

    The issue isn’t that your trades will move market prices, but that everyone else is trying to do the same thing. It’s the integral of these actions that makes beating the market difficult.

    Matt,

    Economists have a lot of strange theories that probably aren’t very realistic, but the belief of efficiency, even if it is only approximately true, isn’t one of them. It’s like Newton’s laws of motion–something inherent to any market-like system itself, not the peculiarities of people (or even human psychology). Perhaps we’ll get an Einstein who will disprove the EMH in a brilliant fashion, but I wouldn’t hold my breath.

    Sebastian,

    It’s not the instability of the stock market that makes it hard to pick. It’s that the collective act of millions of people picking causes stocks to revert to an approximately correct price. Beating those people means knowing something everyone doesn’t.

    Robb,

    Any reasoning system depends on the axioms they choose. Scientists don’t like to admit it, but they choose a lot of axioms that philosophers or mathematicians don’t.

    Now, I happen to believe these axioms are the correct choices, even if just for the reason that they are the simplest set of axioms we’ve encountered that still allow for powerful conclusions. However, if you spend your life working in a world with fewer axioms you end up studying a lot of situations which are further from the everyday reality scientists deal with.

    -Scott

  • Steve O

    That’s a false dichotomy. Plenty of biologists believe in God… The men and women who dig the deepest into biology don’t break everything down to levels they can understand–they uncover MORE questions. I don’t know the statistics, but there have been a few prominent biologists who came to believe in God because of the beautiful complexity in our natural world.

    I don’t think you’re trying to be blasphemous just for the sake of offending people, but it’s kind of offensive to compare a belief in God to a belief that stock picking works. Stock picking can be and has been “scientifically” proven to be wrong. That’s completely different from the much deeper question of the existence of God, which, by the way, many smart people have concluded is evidenced (dare I say, proven?) in nature.

  • Paul

    Hey Scott, I’m an old dog with lots of engineering background – I’ve also started 8 businesses as diverse as Soccer Schools, Fluid-flow Acceleration, Webots and Pain Management. I love your take on this subject. Simple writing too.
    I have 4 close associates (engineers) who have written (separate) trading software. They are among the smartest people I know (focus, mental grasp, mental manipulation), and while somewhat successful in their inventions – they still prove your (soft) rule.
    I also experienced that every training brainwashes (unless you are old or wise). I think getting beyond my “engineer think” took 7 years outside of engineering (80:20… it’s hard to penetrate the deeper layers). Medical doctors, who invest more, are more “damaged” in their “suppositions” of superiority – recovery is rare. I still like them, but am guarded in conversations.
    The greatest inventors, and I have spent considerable time with several, are extremely multidisciplinary – also double sided as regards brain development.
    Enjoyable debates regarding God’s existence require integrated knowledge of many subjects, but pointless without linguistics, and probably pointless anyway! the old fish versus fisherman parable holds…
    Though I happen to agree with your generalities there too.
    Good going!

  • Mark Edwards

    I don’t fault engineers for their arrogance. Tell me the success rate of your engineering friends, and it would be more evident if it was well-founded.

    Extraordinary topic uncovered here, Scott. I always learn something from your articles. Now that you mention it, it does seem as if there is a generalized viewpoint in various disciplines. For example, scientists have been trained to question everything, so they’re less likely to take religion on blind faith. Of course, there are always outliers.

    Certain skill sets give confidence when you bring them into other fields. When I learned to juggle, that made me confident that I could learn “anything” I wanted, provided I pursued it wholeheartedly. I still live under that “delusion,” but it’s a wonderful fallacy that makes me capable of more than if I had believed otherwise of myself.

    Leonardo da Vinci believed that you needed at least “three” different angles to fully understand something. I think every group has a piece of the puzzle. Cross-pollination of various disciplines is great because it breathes life back into each.

  • Matt

    Hi Scott, really enjoyed this read. I have been thinking for a while about the key skill sets of the different professions – what is the core lessons from their view of the world?

    To an engineer everything is a system, to a salesperson everything is a pitch, to a lawyer everything is a negotiation, to an accountant the $ value rules, to a caretaker everything is connection and understanding, to a designer its visual appeal, etc. etc.

    While these are simplifications to the extreme, they are all still “right” simultaneously. So what key knowledge can we extract from the major professions?

    If anyone has any links on this, I’d appreciate it.

  • Nate Glenn

    Your talk of systems reminds me of a good book I just finished: Systemantics, or The Systems Bible, as the newer editions are called.

  • Scott Young

    Steve O,

    If you think this is blasphemous, you should read my other article!

    http://www.scotthyoung.com/blo

    Paul,

    I think open-mindedness is inversely correlated with the status of your field. Medical doctors are highly respected, so there’s less impetus for them to think outside of their field. I believe status of a field is correlated (although not exactly) with correctness, so the two effects compound. Smart people are more often right, but they also have a higher status which prevents others from changing their viewpoints.

    Mark,

    I don’t know the details of their finances, but we can look to categories of active investment classes (such as venture financing, active mutual funds) and see it performs poorly compared with the market.

    The problem with stocks is that (a) expected return is positive, so you should make money, on average (b) risk increases expected return, so you may make (a lot) of money, especially if you don’t fully understand the risks you’re taking.

    I have a relative that works as a hedge fund manager, PhD from Harvard in econ, access to information that the typical engineer would never get. I asked him where he keeps his money. He puts it in index funds.

    -Scott

  • Ming

    Interesting read. Some thoughts that I had.

    I think one of the reasons why engineers, and to an extent STEM professionals, think they can but may fail at succeeding in the financial world is the difference between the fundamental parts of the two systems that produces outcomes.

    A mathematical/mechanical/biologic system is composed of understood/predictable parts that can logically be explained from one to another. Changing one variable in a link in a STEM-system, usually, has a predictable and logical outcome that can be expected somewhere down the line. Manipulate a variable/hardware/protein and you can logically deduce, down the chain of events, what should happen.

    An economic-system is FAR more complex, imo. Because the fundamental parts are composed mainly of people. It’s more than just looking at patterns in the numbers and trying to deduce some correlations in order to produce an outcome. It’s millions of human brains, which have yet to be understood by far, interacting with millions of other human brains.

    IMO, the study and understanding of economic/financial systems are MUCH more about studying behavior and not about the numbers.

  • Max

    I think that they have trained to solve the problems, for example the more you use to calculate things is the more think broad.

  • Austen

    I think the issue here is merely that the engineer severely underestimates the complexity of the system. Any time you try to analyze a natural system, you of course need to abstract it into a model so that it can be reasoned about mathematically. Many of the models engineers normally study have been well-established and refined by this point. The stock market is not one of these models. But to say that it’s not possible to come out ahead even if you have a thorough understanding of the system is too strong of a conclusion, I think. I’m sure high-profile companies like goldman-sachs do alright using algorithmic trading.

    Which is another issue–like you said, the stock market is, in the very long run, a zero sum game. So if one company has spent decades refining some intricate trading model, they will probably be reluctant to make that public knowledge.

    So I don’t think it’s that an engineering perspective is ill-fit for a system such as the stock market; just that any engineer who tries to model the system on his own will likely fail due to the sheer complexity he or she is faced with. We are used to standing on the shoulders of giants.

    With all that said, I obviously thought this was an interesting read. While generalizations are simply that–generalizations–they don’t come out of thin air. They must stem from some underlying pattern.

  • Eric-Wubbo

    Well, while I am not sure about engineers, I have heard of at least one mathematician who got very rich starting a hedge fund (http://en.wikipedia.org/wiki/J…, and at least one who could be considered a physicist (http://en.wikipedia.org/wiki/M

    Ultimately, of course, if I may make the comparison to computer games, engineering is more like playing a PvE game (boss mobs can always be beaten by using a certain set of strategies), while stock picking is more like a PvP game (like arenas, where strategies are more like game-theoretical rock-paper-scissors, and there therefore is not a single ‘correct’ strategy that always works).

    For the rest: the fresh look of an ‘outsider’ is always nice, as long as the outsider is not too arrogant and is willing to learn about the new field. After all, the kidney tubules puzzled doctors until an engineer came along who recognized them as a fluid filtration system.

    And yes, all of us have different predispositions and tendencies, which work well in some situations but harm us in others; many scientists (while being smart) are bad entrepreneurs; many researchers are bad teachers while many excellent teachers are mediocre researchers; many good managers are poor leaders and some excellent leaders are mediocre managers. In short: I interpret your piece as a plea that many people tend to see themselves as being able to excel in any field to their liking due to their ‘smartness’ and successes in other fields, but that we all have our limits, and some humility and willingness to listen to, learn from and cooperate with others would benefit almost everyone.

  • Sam Altman is another example of an engineer who’s been a fantastically successful investor. Even after having sold his startup for millions and taken over as president of YC, he’s made the vast majority of his wealth from investing his own money into companies.

    Sure that’s just an anecdote, but the original blog post offers even less in terms of evidence that engineers are worse than average investors.

  • Mark

    Sam Altman is another example of an engineer who’s been a fantastically successful investor. Even after having sold his startup for millions and taken over as president of YC, he’s made the vast majority of his wealth from investing his own money into companies.

    Sure that’s just an anecdote, but the original blog post offers even less in terms of evidence that engineers are worse than average investors.

  • Fadzlan

    I think the point that Scott is trying to make is about gaming the system per se.

    There would be some difference I think between approaching to invest into one particular company, spending some time knowing the founders and the company, versus investing in a particular stock exchange, treating the exchange as algorithmic problem. One is seeing a company as individual company and the other is seeing a lot of companies as a system. I think the point that he is trying to make is that there is a tendency to see things at system level for an engineer.

    That, and the fact that companies that don’t go public are not really liquid, warrants a more thoughtful approach. And since private companies are generally not that accessible in the market means that any market correction is going to happen later than sooner.

  • Fadzlan

    I think the point that Scott is trying to make is about gaming the system per se.

    There would be some difference I think between approaching to invest into one particular company, spending some time knowing the founders and the company, versus investing in a particular stock exchange, treating the exchange as algorithmic problem. One is seeing a company as individual company and the other is seeing a lot of companies as a system. I think the point that he is trying to make is that there is a tendency to see things at system level for an engineer.

    That, and the fact that companies that don’t go public are not really liquid, warrants a more thoughtful approach. And since private companies are generally not that accessible in the market means that any market correction is going to happen later than sooner.

  • Bianca

    It’s a lot more unrelated but it’s still related enough to be connected but it reminds me of some writings by Richard Feynman I saw in brain pickings about art.( https://www.brainpickings.org/2013/01/17/richard-feynman-ofey-sketches-drawings/) It explained about how art was different from science, that there really was no right way of doing things. People can have different styles and they can all be right. I remember being confused by this same idea as I decided to start drawing. It was not mathematics.

    In reading poems, they describe that your interpretation of it is the right one and that tells a lot about how you think. I was very much confused. I thought it would make more sense to do something in a more scientific way, look at a wide variety variety of thoughts on a subject objectively and form a conclusion based on that. In finding creative solutions to things, my sense of possibility always told me that the first solutions that came to mind were always more likely to be less creative than later developed ideas as certain business ways of creative problem solving told me. The first assumptions were always the last thing to look at yet in subjects for art, it seemed feelings were the inspiration for creativity rather than finding connections in other logical systems and concepts from everyday descriptions of objects to various scientific fields. Think of different words related to fish. I remember fisherman, water, fishing pole, a law regarding fishing, some facts about deep water fish. The more ideas I make, the more unconventional they become. Yet this understanding of what comes first, those instances where you mistake a word for another word and what you see in the clouds tell you about your current understanding of things and that can reveal a lot about you. A little boy who sees fighting video game characters is different from the old man who sees his old wife in the sky.

    I’ve forgotten these types of field differences over time. As time passes, the more similarities I find in other subjects and the more analogies I find I can cross over each. Though, some subjects are more likely to be connected to other subjects, a bit like economics, business and psychology, all dealing with something that requires an understanding of humans. Though. I’ve done connections before from widely unrelated subjects like war tactics and human biology. Meh, and that one didn’t involve any human wounds so it wasn’t a literal connection.

    I already had this idea of learning a breath of subjects but not for logical distinctions but the creative ideas that come with it. This is interesting as I keep forgetting that there are also logical, more literal connections to other subjects after all.

    Thanks for the read, anyway, Scott. Good luck.

  • Bianca

    It’s a lot more unrelated but it’s still related enough to be connected but it reminds me of some writings by Richard Feynman I saw in brain pickings about art.( https://www.brainpickings.org/… It explained about how art was different from science, that there really was no right way of doing things. People can have different styles and they can all be right. I remember being confused by this same idea as I decided to start drawing. It was not mathematics.

    In reading poems, they describe that your interpretation of it is the right one and that tells a lot about how you think. I was very much confused. I thought it would make more sense to do something in a more scientific way, look at a wide variety variety of thoughts on a subject objectively and form a conclusion based on that. In finding creative solutions to things, my sense of possibility always told me that the first solutions that came to mind were always more likely to be less creative than later developed ideas as certain business ways of creative problem solving told me. The first assumptions were always the last thing to look at yet in subjects for art, it seemed feelings were the inspiration for creativity rather than finding connections in other logical systems and concepts from everyday descriptions of objects to various scientific fields. Think of different words related to fish. I remember fisherman, water, fishing pole, a law regarding fishing, some facts about deep water fish. The more ideas I make, the more unconventional they become. Yet this understanding of what comes first, those instances where you mistake a word for another word and what you see in the clouds tell you about your current understanding of things and that can reveal a lot about you. A little boy who sees fighting video game characters is different from the old man who sees his old wife in the sky.

    I’ve forgotten these types of field differences over time. As time passes, the more similarities I find in other subjects and the more analogies I find I can cross over each. Though, some subjects are more likely to be connected to other subjects, a bit like economics, business and psychology, all dealing with something that requires an understanding of humans. Though. I’ve done connections before from widely unrelated subjects like war tactics and human biology. Meh, and that one didn’t involve any human wounds so it wasn’t a literal connection.

    I already had this idea of learning a breath of subjects but not for logical distinctions but the creative ideas that come with it. This is interesting as I keep forgetting that there are also logical, more literal connections to other subjects after all.

    Thanks for the read, anyway, Scott. Good luck.

  • Bianca

    It’s interesting that you say that logicians are more likely to believe in God because of its emphasis on the more mysterious and unknowable. It seems to me that God that did it all was simply jumping to conclusions. A friend of mine told me about science and that told him it was so great, that there must be a God behind it. Science for me brought greater disbelief about God. Learning somewhat from layman’s understanding of quantum mechanics told me how unpredictable reality outside Earth can be and how much even with all the signs pointing to an easy explanation such as God, science still manages to answer many many questions. My friend told me it was absurd that the universe can come to exist by itself or by science. I guess we never came to an agreement. Though, reading things from philosophy shown me just how much one argument can change your view, how beliefs can change over time as I keep questioning myself over and over. There are possibilities out there, things we still don’t know. I’m stuck as a militant agnostic and as my beliefs change, I’d doubt that part of me would change.

  • Bianca

    It’s interesting that you say that logicians are more likely to believe in God because of its emphasis on the more mysterious and unknowable. It seems to me that God that did it all was simply jumping to conclusions. A friend of mine told me about science and that told him it was so great, that there must be a God behind it. Science for me brought greater disbelief about God. Learning somewhat from layman’s understanding of quantum mechanics told me how unpredictable reality outside Earth can be and how much even with all the signs pointing to an easy explanation such as God, science still manages to answer many many questions. My friend told me it was absurd that the universe can come to exist by itself or by science. I guess we never came to an agreement. Though, reading things from philosophy shown me just how much one argument can change your view, how beliefs can change over time as I keep questioning myself over and over. There are possibilities out there, things we still don’t know. I’m stuck as a militant agnostic and as my beliefs change, I’d doubt that part of me would change.

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