Investing in the Classics

Hume’s An Enquiry Concerning Human Understanding: On Custom

Please note that for the purposes of this analysis, I use the Eric Steinberg edition of Hume’s An Enquiry Concerning Human Understanding. Please refer to a previous analysis which I build upon in this analysis.


In Hume’s deconstruction of experience, he acknowledges that unfettered skepticism, as employed by many of his contemporary philosophical peers, could never undermine our reasoning from common sense: nature always wins out against abstract reasoning. However, Hume reaffirms that experience does not stem from rational understanding, for there is no justification as to why one should reason according to cause and effect because of the problem of induction, and yet people never fail to do so. Hume concludes that custom (i.e. habit) is the natural faculty in man that allows one to use experience properly. For investors, customs and habits are something with we unknowingly rely on everyday to sift through vast amounts of information and make judgments. Therefore, it is important to understand the limitations and proper use of habits in order to build in awareness of and a margin of safety into all of our actions.


Hume asserts that there is some innate faculty in man, which we call custom, that makes us use experience in a sensible way. Without custom, Hume remarks, reasoning that concerns matters of fact could not extend beyond memory and present sense experience. Therefore, one could not speculate nor even act if custom had not implanted in us the ability to see certain actions as having certain consequences. Hume writes:

“And it is certain we here advance a very intelligible proposition at least, if not a true one, when we assert, that, after the constant conjunction of two objects, heat and flame, for instance, weight and solidity, we are determined by custom alone to expect the one from the appearance of the other. This hypothesis seems even the only one, which explains this difficulty, why we draw, from a thousand instances, an inference, which we are not able to draw from one instance, that is, in no respect, different from them. Reason is incapable of any such variation… All inferences from experience, therefore, are effects of custom, not of reasoning” (Section V, Part I).

Cause and effect allow the mind to move from one thought to another. When these laws of association are led by custom, they form very strong instinctive beliefs. This is why one instance is generally not taken as a very convincing account of cause and effect as Hume points out. It takes many occurrences to build this belief, even if the first instance carried the same exact relationship. While this makes humans slower to process and act, such prudence in forming beliefs is an important process in order to avoid making perilous mistakes. Investors ought to adhere to this principle, as it mitigates the issue of selection bias. Though one ought not to be too set in their ways, for one should remember Hume’s overarching message that experience is always fallible.


Hume makes notice of the matter of fact that humans are in a peculiar position of relying on experience in order to make sense of the sensible world and be able to act, yet there is no rational basis for believing in our experience as certain. Custom is undoubtedly central to human life. Hume notes that someone thrown into the world with no prior experience would have no understanding of the process of cause and effect. Life would be an unintelligible string of unconnected events. Therefore, Hume concludes that:

“Custom, then, is the great guide of human life. It is that principle alone, which renders our experience useful to us, and makes us expect, for the future, a similar train of events with those which have appeared in the past. Without the influence of custom, we should be entirely ignorant of every matter of fact, beyond what is immediately present to the memory and senses. We should never know how to adjust means to ends, or to employ natural powers in the production of any effect. There would be an end at once of all action, as well as of the chief part of speculation” (Section V, Part I).

Hume remarks that it is fitting that our knowledge of causation should be formed by instinct rather than by reason. It is very important that we see the world causally, since it is the source of all action. Yet, because it lacks reason as its foundation, it is also a chief part of speculation. It relieves man of his ignorance of the external world – epistemologically speaking – and yet, if taken too far beyond its prudent means then it becomes speculative. For investors, Hume provides epistemological account on the origins and nature of speculation.


Hume argues that it is sensible to rely on custom, even though evidence is fallible and subject to the problem of induction. However, Hume asserts that the use of custom must be accompanied with prudence and some reasoning from diligent observation. Hume writes:

“One, who in our climate should expect better weather in any week of June than in one of December, would reason justly, and conformably to experience; but it is certain, that he may happen, in the event, to find himself mistake. However, we may observe, that, in such a case, he would have no cause to complain of experience; because it commonly informs us beforehand of the uncertainty, by that contrariety of events, which we may learn from a diligent observation. All effects follow not with like certainty from their supposed causes” (Section X, Part I).

Expectations based on evidence are a very reasonable form of evidence. However, when results deviate from our expectations, one cannot blame experience for its failure to produce a similar result for the very faculty of experience suggests that experience is indubitably fallible, and diligent analysis reveals this to be even more obvious. Therefore, less prudent investors – dare I say speculators – who blame their failures on “black swans” and the like need not look any farther than themselves to find the true culprit.


Custom has a strong power of shaping our beliefs. Hume argues that we make inferences by the means of imagination, but we still careful distinctions between fiction and belief on the basis of custom. First, Hume posits that imagination is the faculty by which “thought it cannot exceed that original stock of ideas, furnished by the internal and external senses, it has unlimited power of mixing, compounding, separating, and dividing these ideas, in all the varieties of fiction and vision” (Section V, Part II). Hume posits that the faculty of imagination is what allows us to make us of our ideas in a way that is not directly apparent from experience, by which we draw inferences. For investors, imagination is the faculty by which one conducts scenario analysis or attempts to formulate solutions to a company’s problems, for example.


Hume suggests that we make inferences by means of the imagination, but draws a careful distinction between fiction and belief. While fiction is the product of pure imagination by means of which we can conjure up all sorts of images derived from our simple impressions, belief is a combination of imagination and a certain sentiment that we cannot control that suggests to us that our imaginings correspond with reality. Hume asserts that “belief is something felt in the mind, which distinguishes the ideas of judgment from the fictions of imagination. It gives them more weight and influence; makes them appear of greater importance; enforces them in the mind; and renders them the governing principle of our actions” (Section V, Part II). When some memory or sense impression is present to our minds, the force of custom will then carry the imagination to think of something to which that impression is constantly conjoined. This force of custom forms our beliefs, and creates a more vivid, forceful, and firm version of our pure imaginings. For the investor, imagination is a guide for creative and unconventional means of analysis. Meanwhile, custom is the force that grounds the inferences and ideas from imagination based on their plausibility and probability, thereby rendering them useful and actionable for the investor.


Since custom is such a formidable part of our beliefs, Hume asserts that belief should be proportioned to evidence. In this way, the imagination and other problems, such as of selection bias, will be prevented from clouding one’s judgment. Custom, if not tempered with prudence, can lead to false assumptions. Hume states:

“A wise man, therefore, proportions his belief to the evidence. In such conclusions as are founded on an infallible experience, he expects the event with the last degree of assurance and regards his past experience as a full proof of the future existence of that event. In other cases, he proceeds with more caution: He weighs the opposite experiments: He considers which side is supported by the greater number of experiments: to that side he inclines, with doubt and hesitation; and when at last he fixes his judgment, the evidence exceeds not what we properly call probability” (Section X, Part I).

Hume states that in those cases where all evidence points to one particular conclusion, we can be almost certain as possible that that conclusion is correct. However, when there is evidence both for and against a certain conclusion, we can regard that conclusion only with a certain degree of probability, to the extent to which the evidence for it outweighs the evidence against it. Investors ought to take heed to this simple but timeless message. In order to provide a true margin of safety, risk and reward must be diligently, objectively, and intelligently weighed. The prudent investor realizes that customs, when used properly, can provide a time and tested framework for consistent and prudent judgment. The prudent investor will realize that their conclusions are certainly fallible; therefore one ought to maintain humility despite the necessity of contrarian action.

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