The “Wisdom Hierarchy”, shown above in a pyramid format, was first formulated by organizational theorist Russell Ackoff in 1989. It describes the evolutionary path from mere data to having wisdom.

The distinction between data, information, knowledge and wisdom is useful as a mental model and can assist us when analyzing the world around us and making decisions.

Data

Data is raw facts, events, experiences and observations. Data can be thought of signals we receive through our senses. Data is defined by what it is not: it lacks meaning or value, is unorganized and unprocessed.

Examples of data include: stock prices, weights of items, precipitation records, temperature, records of births and deaths, tally of Netflix streams for the month, votes, sports scores, etc.

Information

Information is typically defined by reference to data, usually that information is data that has been organized or categorized so there is meaning and value to the recipient of the information. Information is data that has relevance and context.

For example, temperature readings all around the world are data. Having the data organized so that we can determine global temperature patterns gives rise to information.

Knowledge

Knowledge is the ability to take information and synthesize understanding. Knowledge is “a mix of information, understanding, capability, experience, skills and values.” Source. Knowledge often requires expertise and the ability to place information within context of experience. Knowledge can arise from the modeling of information.

For example, facts and figures about the economy and stock market are data and information. Knowledge is the ability to put that information into context and realize where we are in the market cycle.

Wisdom

Wisdom is a difficult and elusive concept not easily captured by definition. It is beyond merely having knowledge, it is the ability to identify and apply relevant knowledge. “It is the synthesis of knowledge and experiences into insights that deepen one’s understanding of relationships and the meaning of life. In other words, knowledge is a tool, and wisdom is the craft in which the tool is used.” Source.

For example, if data and information and knowledge provide information about the economy and the stock market and where we generally are within the market cycle, wisdom is knowing what actions to take or not to take. This wisdom typically only comes with experience and higher-level learning.

Let’s go Blues!

Another example bringing these four related concepts together:

Data: The St. Louis Blues defeated the Boston Bruins on June 12th 4-1

Information: That win was in game seven of the Stanley Cup Final.

Knowledge: The Stanley Cup final is the NHL championship and is a best of seven games contest. Thus, the Blues won the Stanley Cup which is the first in their franchise’s 52-year history.

Wisdom: Major sports championships often are rare events that should be cherished when your team wins. Enjoy it. Live in the moment. Don’t expect it every year.

The Key Point

The key point of the wisdom hierarchy is realize when you are being fed data vs. information vs. knowledge vs. wisdom. With the rise of the internet, each of us has access to nearly all the world’s data and information with a few clicks of our mouse or smartphone. We are inundated with data and information.

Much of the data and information we receive is not knowledge. It’s often not in context and made relevant. It’s just drinking from a fire hose. Keep on the lookout for when information is just information or when it is presented with the level of knowledge which means that it has context and relevance. Likewise, let’s recognize in ourselves when we are just spewing facts vs. having the knowledge to put it in context and make it relevant.

The most difficult distinction is knowing when we are receiving knowledge vs. wisdom. As compared with the other three categories, wisdom is rare.

For example, in the investment industry, much of the expert opinion is not actually wisdom but mere knowledge, and it is very easy to be wowed by someone with a great deal of investment knowledge. Investment experts tend to know all sorts of facts and figures about the stock market and the economy. They know a great deal about various aspects of specific stocks and other investments. However, knowing the the current P/E ratios, earnings forecasts and shape of the yield curve in the context of historical perspective, while useful, is just knowledge.

Compare investment knowledge with investment wisdom. When wisdom is found in the investment industry it often obvious and seems simple. It usually can be thought of as “simple but not easy.” Investment wisdom is often hard to implement behaviorally while acting on mere investment knowledge is easy.

For example, consider Warren Buffet and his investing wisdom. In addition to being extraordinarily successful as an investor, he and his partner Charlie Munger are known for being incredibly wise. Here are a few of Warren Buffett’s key nuggets of investment wisdom:

Be greedy when others are fearful, and be fearful when others are greedy.

You only find out who is swimming naked when the tide goes out.

Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need,

These simple truths are based on a lifetime of learning and experience. Similarly, other investors such as Howard Marks and Michael Mauboussin are known for wise investment counsel.

Learning to spot the difference between wisdom and mere knowledge in investing can make a big difference in our investment results.

Primary sources for this IFOD:

The wisdom hierarchy: representations of the DIKW hierarchy

The Model Thinker: What You Need to Know to Make Data Work for You