Theory should inform our decisions but..

In short, I think theory should inform our decisions but not dominate them. If we entirely ignore theory, we can make big mistakes. We can fool ourselves into thinking it’s possible to know more than everyone  else and to regularly beat heavily populated markets. We can buy securities for their returns but ignore their risk. We can buy fifty correlated securities and mistakenly think  we’ve diversified. . . . 

But swallowing theory  whole can make us give up on finding bargains, turn the process over to a computer and miss out on the contribution skillful individuals can make. The image  here is of the efficient-market-believing  finance professor who takes a walk with a student.

“Isn’t that a $10 bill lying on the ground?” asks the student.
“No, it  can’t be a $10 bill,” answers the professor. “If it  were, someone would have picked it up by now.”
The professor walks away, and the student picks it up and has a beer.

“What’s It All About, Alpha?” July 11, 2001

Theory should inform our decisions but..