Lesson 23 of 25 · 6 min
Why the advice a person would give someone else differs from their own
A file of six numbers and a paragraph of history describe one account, and they do not produce the same verdict.
A person assessing someone else's position works from a summary. A person assessing their own works from a history. The difference is not effort or honesty; it is that only one of the two has access to the reasons, and the reasons are what make a position feel unlike its own description.
This is the gap between the outside view, which treats a case as an instance of a category, and the inside view, which treats it as a particular thing with its own causes. The outside view is available about strangers because nothing else is. The inside view crowds it out about oneself because the detail is there and detail is compelling.
Write the same position both ways. Outside: net worth $2,930,000, of which $2,080,000 — 71.0 percent — sits in one issuer, which is pledged. Balance $1,310,400, a loan-to-value of $1,310,400 ÷ $2,080,000 = 63.0 percent against a threshold of 72 percent. Trigger value $1,310,400 ÷ 0.72 = $1,820,000, so headroom is ($2,080,000 − $1,820,000) ÷ $2,080,000 = 12.5 percent. At an illustrative 34 percent annualised volatility a monthly deviation is 34 ÷ √12 = 9.81 percent, so the cushion is 1.27 ordinary months.
Inside: the holding was accumulated over a working life, the business is understood better than anything else in the account, the line has been open for years without incident, and the current price reflects a temporary problem. Every clause of that is true and none of it changes 12.5 percent or 1.27 months.
The two descriptions are of the same account on the same day. The first fits in one line and the second takes a paragraph, and length is not a measure of relevance to the maintenance test.
Key terms
- Outside view
- Assessing a case by the statistics of the category it belongs to, using the small number of facts a stranger would have.
- Inside view
- Assessing a case by its particulars and its causes. Richer, more convincing, and not obviously more accurate.
- Self-other asymmetry
- The pattern by which the same person applies the outside view to others and the inside view to themselves, and reaches different conclusions.
Worked example
One account, written as a stranger's file
Net worth $2,930,000. One pledged issuer worth $2,080,000. Balance $1,310,400, threshold 72%, illustrative volatility 34%.
- Share of net worth in one issuer
- 71.0%
- Loan-to-value
- 63.0%
- Trigger value
- $1,820,000
- Headroom
- 12.5%
- Monthly deviation
- 9.81%
- Headroom in ordinary months
- 1.27
$2,080,000 ÷ $2,930,000.
$1,310,400 ÷ $2,080,000.
$1,310,400 ÷ 0.72.
($2,080,000 − $1,820,000) ÷ $2,080,000.
34 ÷ √12.
12.5 ÷ 9.81.
Six rows, no history, no reasons. This is the version a person would be given about somebody else, and it is the version that matches the agreement.
Check yourself
A pledged holding of $2,080,000 carries a $1,310,400 balance at a 72 percent threshold, with 34 percent annualised volatility. How much cushion is that in ordinary months?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.