Search results for: Dunning Kruger

Alan Greenspan on the Dunning–Kruger Effect

Did I write The Dunning–Kruger effect?

I mean “Activism.”

You see, Mr. “1%.FOMC.Rates-Nonfeasance-banks.can.self.regulate-its.called.innovation-Greenspan.Put,” had the unmitigated gall, the colossal cojones, the planet sized testicles to blame the current slow recovery on Government Intervention!

Given how utterly unaware the former Fed Chairman is of his own gross incompetentcies, I thought if I used the actual, title no one would believe me.

Alan Greenspan on Activism

Abstract: The US recovery from the 2008 financial and economic crisis has been disappointingly tepid. What is most notable in sifting through the variables that might conceivably account for the lacklustre rebound in GDP growth and the persistence of high unemployment is the unusually low level of corporate illiquid long-term fixed asset investment. As a share of corporate liquid cash flow, it is at its lowest level since 1940. This contrasts starkly with the robust recovery in the markets for liquid corporate securities. What, then, accounts for this exceptionally elevated level of illiquidity aversion? I break down the broad potential  sources, and analyse them with standard regression techniques. I infer that a minimum of half and possibly as much as three-fourths of the effect can be explained by the shock of vastly  greater uncertainties embedded in the competitive, regulatory and financial environments faced by businesses since the collapse of Lehman Brothers, deriving from the surge in government activism. This explanation is buttressed by comparison with similar conundrums experienced during the 1930s. I conclude that the current government activism is hampering what should be a broad-based robust economic recovery, driven in significant part by the positive wealth effect of a buoyant U.S. and global stock market.

Perhaps Messrs Dunning and Kruger would not mind if we renamed their research the Alan Greenspan Effect?


Source: PDF
Greenspan on Activism
Council on Foreign Relations

Mount Stupid (Again)

Source: Saturday Morning Breakfast Cereal



Two weeks ago, I discussed the importance of understanding how much I know (or do not know).  As noted then, “I pay lots of attention to meta-cognition, and how when we develop skills we also learn the separate skill of self-evaluation. This is of enormous importance to traders and investors; I find it fun to bring in parallel experiences from other realms.”

I enjoy meta-cognition as much as the next wonk, and have written about Dunning Kruger too many times to count. However, nothing beats the succinct phrase “Mount Stupid.”



Mount Stupid (June 3, 2015)

Meta-Cognition: Understanding How Much I Know or Do Not Know

Source: Both Sides



I love this Simon Wardley chart above, found via Mark Suster.

It is richly filled with insights from psychology, with Dunning Kruger’s concept of meta-cognition as a skill, and just for fun, the Socratic paradox of “The only thing I know is that I know nothing.”

This is worthy of a longer exposition, which I will attempt once I recover from the minutia of USPS health care legislation; for now, a quick few thoughts.

I pay lots of attention to meta-cognition, and how when we develop skills we also learn the separate skill of self-evaluation. This is of enormous importance to traders and investors; I find it fun to bring in parallel experiences from other realms. Recently, it has been radio and tennis. Both are interests I have come to late in life, starting each in my early 50s, with no background in either.

Tennis is hard, as anyone who watches the U.S. Opens can see. I was surprised to learn Radio was even harder.

To succeed at tennis, you need to master a series of technical mechanics, along with timing, footwork, proper distance, eye-hand coordination, mobility and an intriguing mental game. As someone who has always had issues with proprioception (I am a klutz), these physical mechanics are challenging.

When a project is progressing too slowly, seeking out expert help is advised. So I did.

Going slow to go fast applies to driving fast on a race track as well as playing tennis well. I learned that it is not merely about hitting the hardest or being the fastest to the ball. I was terrible two years ago, but via a helpful former pro player, a few modest technical changes made me significantly better. The mechanical body positionings made my forehand better, I developed a backhand (where previously I had none) a drop shot and slice shot came along, and the beginnings of an actual serve appeared. I was much, much better than before.

But this is not to say I was any good. What was most shocking to me was as I improved, I came to realize how truly terrible I was. Where previously I imagined myself to be a 4 or 5 on a scale of 10, my improvements came with lowered self-rating. Am I a 4? No wait a 3, no, worse, barely a 2.

Understanding meta-cognition abstractly was one thing, but living it was an entirely different thing.

Radio was much worse.

The idea behind Masters in Business was always pretty simple: find intelligent, successful people, and rather than ask them ephemeral nonsense – “What’s your favorite stock, when will the Fed raise, where will the Dow be in a year? – have instead an adult conversation about who they are and how they got that way.

My assumption was the content alone would be sufficient. Hey, how hard is it to talk? We do it every day. It took about 30 shows to disabuse me of that notion.

Al Mayers was Bloomberg’s head of radio. Each week, he would patiently pull me aside and deconstruct the last show – explain interviewing tactics, listening skills, how to pick up subtle things the guest said and then follow up. It was a crash course at not sucking at radio.

Almost 4 years later, and nearly 200 shows, and I can honestly say I have improved from thinking I was a 5 when I was really not quite a 2, to becoming a 6 with occasional glimpses of 7 or 8. This is not artificial humility – if you ever get a chance to watch Tom Keene in the radio studio do a dozen things at once, live on the air, without making an error, you will be in awe. I now know exactly what achieving that level 10 looks like and how much more there is to go to get there.

As always, there are life lessons and investing skills to be pulled from these experiences.

What do you erroneously believe you are great at?


Go on the Daily Show!

Last week, we had the announcement of the end of Jon Stewart’s run on The Daily Show. I had been saving this column for the next TDS disaster, but rather than hold it, I decided to set it free. Enjoy.


A few months ago, my fellow Bloomberg View columnist Megan McCardle anticipated just such a [insert disaster here]. She admonished “Don’t Ever Appear on ‘The Daily Show” warning readers that they will “look like an idiot on the show.”

I think this advice confused cause and effect.

Why? It is not that:

You should not go on The Daily Show because you will be made to look like an idiot.

The proper If/Then clause is reversed. Rather:

IF you are in fact an idiot, THEN you should not go on The Daily Show.

This is a very significant difference, one that has repercussions for anyone considering making an appearance on this (or any other) show. My advice may be more nuanced, but it is the more useful for reasons I detail below.

Let me preface this with a few details: 1) I am not, all appearances to the contrary, actually an idiot (my wife begs to differ); and 2) I actually have been on The Daily Show.

Hence, I present these thoughts not as theoretical abstract, but based on real world experience being a guest on the show. For me, it was a fantastic experience, one that I would not recommend skipping for anything.

Unless you are an idiot. More on that below.

If you are invited to appear on TDS, or Colbert The Nightly Show, or Real Time or any show that mixes comedy with policy, some common sense edicts apply. You should understand how television gets made (its similar to the way sausage gets manufactured). You should be aware of the danger of backfiring when pushing against any show’s culture or ethos. If your own ideology clashes with that of the writer/producer/host, expect pushback. And the importance of having some humility when going on shows such as this cannot be overstated.

Thus, my job today is to provide you with a short set of guidelines for appearing on television. For those of you fortunate enough to be asked to appear on The Daily Show, consider this your pre-appearance media coaching.

First, some background on my experience: I had written a column for Bloomberg View about how McDonalds and Wal-Mart had become welfare queens. They had been gaming the safety-net of Medicaid, food stamps and aid to dependent children in order to shift their corporate labor costs onto the taxpayer. McDonalds even set up a “McHelp line” to walk their minimum wage employees through the process of getting as much government aid as possible. An email came in from one of the producers, and that started a discussion which ran for several weeks. A month later, we filmed my part in my office; the segment was broadcast several months later.

All told, it was a terrific experience – including the spit take from Samantha Bee. But it was not without controversy, and from my experiences, I would suggest a different set of rules from that of my fellow Bloomberg View columnist. Use these questions as your guideline to appearing on The Daily Show:

1) Why do you want to go on TV in the first place?

No one seems to ask this fundamental question, but really – why would you, as a rational person, want to go on TV in the first place? It is bizarre that in the modern age of celebrity, it has somehow become a badge of honor. Where I totally agree with Megan is that if you do not have a compelling reason to go on TV – a foreign world with its own rules and mores, fraught with potential danger – then don’t do it.

Don’t go on just to be on.

If you run a business where broad exposure to the public is a good thing (check!) or engage in a regular debate of ideas (check!), then perhaps some face time on TV might hold some lure for you. Just understand exactly what you are getting into.

2) Don’t go on the Daily Show if you are an idiot.

This is an obvious admonition, but if you watch the show, you know it is continually ignored. Many of you are idiots – not TBP or Bloomberg View readers, of course, but you, the idiot who was forwarded this column from his trader brother-in-law. You may be an idiot, and if that’s the case, you should not go on television at all!

Indeed, the rest of us would appreciate it if you never went out in public, for the world is chock full of way too many idiots.

Here is a fascinating aspect to Rule #2: It will be widely ignored by idiots because part of being an idiots includes being wholly unaware of their own lack of intelligence. This meta-cognition is technically called the Dunning Kruger effect. It means that people who are not especially competent at a given task have no idea of their own lack of skills at that task. Self-assessment is a skill that primarily comes with expertise. It applies to everything: Driving, golf, singing, investing, even one’s own intellectual capacity.

So if you are in point of fact, an idiot, you are most likely wholly unaware of this simple truth. Hence, you should definitely follow Megan’s advice and NOT go on the Daily Show

But the odds are that you will ignore both of our advice if you are ever asked – you will appear on the show. The end result will most likely be hilarious. This is why idiots keep getting asked to appear on shows like TDS: For mockery and our entertainment pleasure. As much as I advise you otherwise, please, don’t ever stop.

3) Avoid sharing intellectually indefensible ideas and ideologies

Too many people remain married to ideas that have been thoroughly disproven. Rather than accept established facts and adjusting their perspectives, they choose instead to discard reality to preserve their own discredited belief system.

This is known as Cognitive Dissonance. And it is an incredibly easy thing to make fun of on television.

Whether believing that tax cuts pay for themselves (Howdy, Kansas!) or not being willing to admit evolution is a thing (Scott Walker, come on down), or fighting marriage equality, or taking absurd positions on global warming, or just about any other BenSteinery you care to engage in, you will be eviscerated on The Daily Show. Their writers are sharp, Jon Stewart is lightning quick, and besides – viewers appreciate that you deserve it.

4) Don’t say anything terribly stupid

This should be obvious, but over the course of a long shoot, stuff can slip out. The person on the other side of the minimum wage debate from me in my segment was Peter Schiff. I know Peter, and I can tell you he is not an idiot; in fact, he is a smart guy. But then he said something terribly foolish on air: “What’s the politically correct word for mentally retarded?

I am not the most politically correct guy in the world, but as soon as I saw that, I knew he was toast. I just imagined the segment producer’s eyes, popping out of the her head cartoon-like with dollar signs on them, as a big Ahh-HOOOGAH sound blared in the background. That line was game over.

Shiff’s faux pas cost me most of my screen time. But it also meant that I was not going to be the guy who got eviscerated. It is a good rule of thumb: Do not say anything especially foolish.

5) Have something worthwhile to say

This should be obvious, but gets overlooked. In the segment on minimum wage, I thought it was worthwhile pointing out several important things: The minimum wage had not gone up for many years; adjusted for inflation, it should have been closer to $11 per hour, many economic studies had shown that raising the minimum wage does not hurt the local economy, and did not reduce employment, etc. The McDonalds welfare help line was offensive, as was gaming their compensation package to max out their government dole. Also of note: Walmart employees, as a group, are often the biggest Medicaid and food stamps recipients within each state where they have many stores.

All of that just seems wrong. These are all worthwhile subjects for discussion. Risking a little personal humiliation to debate the important issues of the day on a widely seen national television show was worth it to me.

6) Don’t relax

The day the show was set to air, I wrote the following: “Over the course of two hours, its pretty easy to say something stupid — especially when one of the funniest people on earth is two feet away making faces and saying very funny things. I hope I didn’t embarrass myself. We’ll find out at 11:06pm or so.”

Indeed, this is the advantage of doing live television over anything recorded and edited. (Megan is dead right about this one, too). I have done other shows like Nightline, where they have a script, and it is the producer’s job to get you to say something that follows their narrative (not yours). After you are asked the same question in a slightly different way for the 6th time, it is easy to slip up and say something you don’t believe. My response is always: “Asked and answered, next question” after multiple attempts to get me to say something against my own beliefs on Nightline.

7) Save Yourself with an F-Bomb

I have a little secret I’ve learned on the rare occasions I do any prerecorded shows: If I really don’t like the way something I am saying is coming out, I drop several F-Bombs into the rest of the sentence, thus rendering it useless for most news shows.

NOTE: This will not help you on the Daily Show.

8) Have a sense of humor about yourself.

I agreed to be part of a spit take that Samantha Bee did. It was great fun, and if you watch the segment, you can actually see me leaning forward to grab a paper towel for her from my desk drawer. I barely got wet, but she soaked herself.

Regardless, you have to have a sense of humor – and some humility – about yourself. Getting spit on by one of the funniest women in the world seemed like a fair exchange.

Those are my suggestions. Don’t be an idiot, don’t say anything terribly foolish, don’t have indefensible ideological ideas, keep your wits about you, and be humble.

If you can follow those rules, then, yes, you should go on The Daily Show.


How’s Your MetaCognition?


“Knowing yourself is the beginning of all wisdom.”



Over the past few weeks, I have been waxing eloquent on the subject of self-awareness, knowledge, and recognizing one’s own lackings thereto. Last week, we discussed the Value of Not Knowing; that followed the prior week’s discussion of why I don’t bother guessing a monthly NFP number.

Today, I want to discuss Self-Enlightenment — why understanding yourself is so important to investors. This isn’t a Zen discussion of achieving a higher sense of oneness with the universe; rather, it is an explanation as to why knowing what it is you actually know, understanding what you don’t know, and having a high level of recognition of the danger when you think you know (but really don’t) is so crucial.

Those of you have seen our “Brain on Stocks” presentations know that MetaCognition is an important part of understanding. You also know that a significant part of expertise is the intense understanding of one’s own skills and limitations. The other side of Dunning Kruger effect — which we have discussed repeatedly — is that the amateur and the unskilled participant are stunningly unaware of their own inferior knowledge and skill set. They do not know what they do not know — often, fatally so.

So perhaps the best question we can ask of an investment manager (or an investor can ask themselves) is not “How Smart Are You?” Rather, it is “How’s your MetaCognition?” How self-enlightened are you? How well do you understand what you don’t know?”

From Socrates to Plato to Aristotle, metacognition was an important part of Greek philosophy. Socrates perhaps most famously declared “I only know that I know nothing;” He was perhaps the first human to wax eloquent on metacognition. It may be counter-intuitive, but understanding one’s own ignorance is the first step to attaining knowledge.

Perhaps Shakespeare put it best in As You Like It: “The fool doth think he is wise, but the wise man, knows himself to be a fool.”

How’s your metacognition?


On the Value of Not Knowing

Its Philosophy Phriday, and as such, I want to discuss my ignorance. Or rather, my justifiable pride in my willingness to say “I don’t know.”

I use this phrase frequently, for there are a wealth of subjects I know very, very little about.

Sometimes I am asked things I could not possibly know, particularly about the future. Rather than guess, I believe the best approach is to admit the truth, then plan accordingly. The alternative is to do what too many people do: Make predictions, then marry those forecasts. This usually leads to catastrophic results.

Understanding what it is I do not know is a core part of my approach to the world. Its why I focus so much on investor psychology and cognitive issues. I want to understand what I don’t know, and what my brain is essentially lying to me about. I believe this approach is rewarding.

You may be somewhat surprised to learn that this is not standard operating procedure for most people in many fields. Perhaps we might blame this failure to admit ignorance on an excess of testing children, who are taught to regurgitate some answer regardless of whether they know its correct or not — but (heh heh) I do not know the actual cause.

In the world of investing, recognizing what you do not know and therefor should not be betting on is paramount. It is an important trait for an investor/asset manager to own. Too many people assume they are making decisions based on what they know, but oftentimes their decisions are based on what they think they know but really don’t.

I am not trying to be cagey or contrarian for its own sake — although I will admit to a dollop of mischievous joy when I watch a TV news anchor’s face when I respond appropriately to a foolish question:

Q: “Where is the Dow going to be one year from mow?”

A: “I have no idea.”

Q:   ( *Twitch* )

Everyone who answers that question with anything other than “I don’t know.” is mostly lying. They DO NOT know, and even worse, they are often unaware of their own ignorance (see our prior discussions on Dunning Kruger effect).

Perhaps worst of all, they mislead the viewer into thinking that they, the expert, does know and that you, the home viewer, does not . . . and therefore, you should BUY MY PRODUCT.

That twitch is not why I answer the way I do (tho its a small reward); Rather, it is the proper answer. It is a reflection of accepting a simple reality denied by (IMHO) 4 out of 5 people in my industry.

There are tremendous advantages in recognizing what you do not know. Acknowledging shortcomings in your informational intelligence is a form of situational awareness that prevents you from being blindsided.

There are other benefits as well. It shifts your focus to process over outcome; it assists you in understanding what is the result of skill and what is dumb luck. It prevents you from being fooled by randomness. And as we have learned, repeatable results that are the result of a process are vastly superior to random outcomes.

This is a more valuable trait, a reflection of a more insightful set of perspectives than you might realize. Some branding experts have (more or less) stated that “You have moved into the niche market of Truth ever since the larger firms abandoned it for more lucrative fields.” Alas, no, this is not marketing schtick. It is a simple acknowledgement of reality, which leads to smarter planning and superior outcomes. It might be more challenging to sell to people — it ain’t slick, does not lend itself to glossy brochures, is hard to manifest in a tagline — but it works.

What are you ignorant about?



Do you know what you don’t know?

A Tweetstorm That Every Investor Should Read
A Wall Street veteran makes the case for acknowledging our ignorance.
Bloomberg, May 11, 2018



Yesterday, James O’Shaughnessy posted a long and intriguing tweetstorm about investor ignorance. Jim is the chairman and founder of O’Shaughnessy Asset Management LLC,1 and the author of the classic investing book “What Works on Wall Street.”

The entire thread is worth reading from start to finish, but here is the beginning:

This post, as regular readers know, is about one of my favorite subjects. To be more precise, it is about our own lack of understanding of our own lack of understanding. From the original work by Daniel Kahneman and Amor Tversky, as laid out in their famous 1974 paper “Judgment under Uncertainty,” to the Dunning-Kruger concept of metacognition — the specific skill needed to recognize one’s own skill set — this foible continues to be of great importance to investors. O’Shaughnessy starts his discussion on a note of humility, writing there are “some things I think I know and some things I know I don’t know.” That simple observation places him ahead of oh, say, 80 percent of all investors. This is not how way too many investors think.

The first step is recognizing what it is you know you don’t know. For O’Shaughnessy, this begins with the simple question, one that is asked every day by financial journalists in print and especially on television, discussed among retail stock brokers, and debated by fund managers: How will the market perform this year or next? This is often paired with a related question: Will stocks be higher or lower in five or 10 years? O’Shaughnessy notes what the probabilities are — stocks do tend to rise over time — but then says he can’t say with any degree of certainty if stocks will indeed be higher a decade from now. 2

This acknowledgement alone bumps him up to the 90th percentile of wisdom among investors.

Most people don’t even try to envision what they don’t know. This brings to mind, of course, that felicitous phrase coined by former U.S. Defense Secretary Donald Rumsfeld, “unknown unknowns.” The human brain, marvelous as it may be, has a blind spot for these. But, truth be told, the universe of what we don’t know is beyond our grasp, even though we tend to fool ourselves into thinking we know more than we do.

This brings to mind something Rob Brotherton, an academic psychologist,  described in his book “Suspicious Minds: Why We Believe Conspiracy Theories.” Citing University of Michigan professor David Dunning, half of the duo behind the Dunning-Kruger effect, he wrote:

An ignorant mind is precisely not a spotless, empty vessel. It’s filled with information — all the life experiences, theories, facts, intuitions, strategies, algorithms, heuristics, metaphors, and hunches — our brain indiscriminately uses whatever is at hand to plaster over the intellectual blind spot.

This is an enormous problem, not just for those who believe that the moon landing was faked, but for investors as well: indiscriminately plastering over the “intellectual blind spots” leads to terrible outcomes in markets. Our lack of awareness of our ignorance may be the enabling cognitive bias that leads to all other investment errors.

That raises some questions all investors should ask themselves from time to time. The second most important is “What am I wrong about?” while the most important is “What do I have no idea I am wrong about?”

The trends of the past decade strongly imply that investors are starting to not only understand this, but change their own behavior in response.

I believe that sending trillions of dollars to low-cost index funds run by Blackrock Inc. and Vanguard Group Inc. is a sign that investors are growing more aware of their cognitive limitations. It indicates, to borrow from Rumsfeld again, a Known Knowns: That costs matter, and that as a rule of thumb, the lower the fee the better the long-term performance. Generally speaking, passive is much cheaper than active.

Investors have also come to recognize their own inability to pick outperforming money managers — a “Known Unknowns.”. Last, the financial crisis of 2008 also taught us that nearly all people lack the ability to anticipate how they themselves will respond in the future to unknown market conditions — this is a “Unknown Unknowns.”

O’Shaughnessy wraps up his tweet storm by noting “While I think I know that everything I’ve just said is correct, the fact is I can’t know that with certainty . . . history has taught us that the majority of things we currently believe are wrong.”

Admitting the possibility of not knowing something, recognizing how much we are ignorant of, is the first step toward preventing the kinds of overconfidence and assumption of omniscience that is so damaging to investors.


1. Disclosure: Some clients of Ritholtz Wealth Management are invested in O’Shaughnessy asset management funds.

2. Although the philosophical implications of this are intriguing, the data geek in him can’t avoid the numbers: “Since 1945, there have been 77 market drops between 5% and 10% and 27 corrections between 10% and 20%.” O’Shaughnessy notes this is a “feature, not a bug” of markets.


Originally: A Tweetstorm That Every Investor Should Read


Transcript: Annie Duke, WSOP Champion


The transcript from this week’s MiB: Annie Duke, WSOP Champion is below.

You can stream/download the full conversation, including the podcast extras on iTunesBloombergOvercast, and Soundcloud. Our earlier podcasts can all be found on iTunesSoundcloudOvercast and Bloomberg.


ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST: This week on the podcast, I have an extra special guest. Her name is Annie Duke and she’s the author of “Thinking in Bets.”

This conversation is not so much about poker although clearly as a world champion in poker and at one point the winningest female poker player for that period, poker does come up but it’s all about thought process, it’s all about not looking at outcomes but thinking about how you think about what you’re doing whether this is business or finance or investing or what have you.

There is a run of cognitive issues and there is a run of misfocus on what we do, how we do it, what we don’t know but should, our own blind spots, our own cognitive errors that really applies to everything. This isn’t just a tell-all poker book.

In fact, I would say poker is really a minor part of the book. It’s the leaping-off point for discussing human cognition, decision-making theory and how we think about the world or should think about the world probabilistically and we very often don’t.
Determine poker is called resulting, looking at outcomes as opposed to process. Anybody who manages other people’s money for living, anybody who engages in behavior whether there’s a decent amount of risk and uncertainty should really not only listen to this conversation, which I found fascinating, but get the book and plow through it. You will learn so much. It’s absolutely fascinating.

So, with no further ado, my conversation with Annie Duke.

RITHOLTZ: I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio. My special guest today is Annie Duke. At one point, she was the winningest female poker player in history. She won the World Series of Poker in 2004 and she is the author of a fascinating new book, “Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts.”

Annie Duke, welcome to Bloomberg.


RITHOLTZ: So, I was struck by some of your definitions in the book and how much they reminded me of investing. My definition of investing is deploying capital on the basis of limited information about an unknowable future. That sounds a lot like the way you described playing poker.

DUKE: It’s almost exactly the way that I describe playing poker. So, the kind of loose definition is decision-making under conditions of uncertainty over time.

So, that will be a relatively loose definition of poker where you’re — just as you said, you’re deploying capital based on limited information. That’s one source of uncertainty about some sort of uncertain future. That would be luck intervening which is the other source of uncertainty.

So, when we talk about decision-making under conditions of uncertainty, those of the two sources which are very nicely put into your definition of investing.

RITHOLTZ: And you also spend a lot of time describing the focus on results and outcomes rather than the process that led us to those results. Tell us a little bit about what led you to that analysis and why so many people look at bad results and think immediately it’s a bad process when that may not be the case.

DUKE: Well, I think that it’s really hard. So, we have this very uncertain relationship between decision quality and outcome quality. So, for example, in poker, I can have the very best hand and I can still lose. I could get dealt aces and you could have a seven and a two and the turn of the cards make it so that you win the hand or vice versa. I could have the seven and two and make terrible decisions in playing that hand and still win.

And that’s really, really similar to the kind of decisions that we make in life and investing in business. And the problem is that getting to be able to see the processes and transparent, the thing that we can see is the outcome of the process.

We can see did it work out or did not work out, did I win the hand, did I not? Did the, you know, did the stock I invested go up in value or down in value? And that’s what we can see and now working backwards from that into what was the decision process is really hard. It’s very opaque. And very often, the quality of the decision doesn’t reveal itself except over time.

So, we can see the outcome right then but very often whether the decision process is good, it takes a lot of time to reveal itself. So, what do we do under those conditions of uncertainty, we have this bias, we have this heuristic which is outcome was bad, OK, that must mean the decision was bad, I’ll take that as a signal. Outcome was good, OK, decision was good

And the problem is that that’s a really poor strategy for learning from your outcomes. It’s great if you’re playing chess, but it’s terrible if you’re playing poker, it’s terrible if you’re investing, it’s terrible if you’re running a business, it’s terrible if you’re choosing a romantic partner, it’s terrible if you’re driving.

That’s the thing about it. So, there’s very good things like that.

RITHOLTZ: I love the term for this in the book that poker players use, they call it resulting.

DUKE: Yes. So, resulting is taking the quality of the result and deciding that that tells you what the quality of the —

RITHOLTZ: And that is not the case at all.

DUKE: That is not the case at all. So, I open the book actually talking about this Pete Carroll —

RITHOLTZ: Super Bowl 2015.


Hiring and Firing Asset Managers

Source: GMO via Idea Farm



Of all the things that investors do, the selection, hiring and firing of managers is simultaneously the most important and yet perhaps the thing most investors are least equipped to do.

I was reminded of that when I saw the chart above, via Ben Inker of GMO. If you look at it from the right perspective, you might find a humorous side to the issue of manager selection. Inker’s perspective is interesting, and whether you agree or disagree with him, his quarterly commentary is always worth reading.

My selective perception — the lens with which I view everything, including his chart — sees this as a case study in investor psychology. The early rise is how any manager comes to the public’s attention; implied in this is how investors pile in into the fund on the mere strength of this publicity, often without doing the requisite research and due diligence. This big pop leads to a few years of undistinguished performance and investor impatience — where the manager may very well be doing exactly what their fund is supposed to and what their process requires — but to the casual buyer, none of that matters. The manager then gets fired. Of course, not long too long after this moment, the market cycle turns and the same environment/sector/cycle that led to the initial outperformance and good performance returns. The next few years are outstanding.

This is no surprise. It is also why so many investors (buy high, sell low) underperform their own holdings.

My own biases make me wonder:

-Did the original investor understand what they were buying?

-Were they looking at a fund that had an outstanding and replicable process, or did they merely buy a prior good outcome, hoping it would keep recurring?

-Was the manager under consideration truly skillful, or merely lucky?

-Was the original fund purchase made on the basis of rational decision making, or was it an undisciplined or emotional choice?

-Does the investor themselves have the requisite selection skillset (and time and money) to review, rank and evaluate managers, in order to determine which of them are appropriate for their portfolio?

That last issue raise the fascinating topic of meta-cognition — meaning: Is the allocator self-aware enough to evaluate their own ability to make that sort of manager selection? As we have learned via psychologists Dunning & Kruger, not only do most of us not have that skill set, very few of us have the tools to self-determine if we in fact do.

Note we are reviewing these concerns from a slightly different argument than the active versus passive debate. As we discussed last week, one should always be reviewing your own beliefs when confronted with contrary evidence. Per that, I am willing to admit that a handful of true alpha creators are at work today, and if you have dollars with them, well then that is terrific and you should stay with with. There are a handful of rare managers who have incredible skills — be it identifying mispriced assets, stock selection, market timing, or even selecting other managers.

Finding these folks is a huge undertaking and a stunningly difficult challenge to undertake. If you are one of the lucky few, then by all means don’t mess with what is working.

On the other hand, if you are unsure if you have the rare set of abilities to review, evaluate and monitor those managers, if you cannot confidently make a distinction between Process vs. Outcome, Luck vs. Skill, Rationality vs. Emotions, or if you are unsure that you possess the ability to honestly assess your own capabilities, then you might need some assistance.

If you’re looking for portfolio guidance and investment counseling, talk to us now. 




When Do You Fire a Manager? (TBP, April 5, 2011)

When should you fire your mutual fund manager? (Washington Post, May 8 2011)

Is Anyone Any Good at Picking Hedge Fund Managers? (TBP, January 23, 2012)

The mutual funds and managers to avoid (Washington Post, May 4 2012)

A Pension Fund Comes to Its Senses (Bloomberg, July 17, 2015)

Being a Stock-Picker Is Just So Hard (Bloomberg, August 11, 2017)


10 MLK Day Reads

My morning MLK Day reads:

• 5 Ominous Signs for the Securities Industry (Bloomberg View)
• Trillion-Dollar Question: Why Don’t More Women Run Mutual Funds? (New York Times)
• Congrats, San Diego, you win by losing Chargers (USA Today)
• Mirror, Mirror, on the Wall, Which Is the Biggest Moocher State of All? (Daniel Mitchell)
• 10 important client considerations with 401(k) rollovers (Investment News)
• Citadel Pays $22 Million Settlement For Frontrunning Its Clients (Zero Hedge)
• Donald Trump, the Dunning-Kruger President (New York Magsee also In crucial ways, Donald Trump is the second coming of George W. Bush (Vox)
• Why Peter Thiel Fears “Star Trek” (New Yorker)
• Yes, it’s possible to dine out and eat a healthful meal. Here’s how. (Washington Post)
• Playboy Interview: Alex Haley Conversation with Martin Luther King, Jr. (Haley) see also How Gil Scott-Heron and Stevie Wonder set up Martin Luther King Day (Guardian)

Be sure to check out our Masters in Business interview this weekend with Brett Steenbarger, clinical psychologist and trading coach who works with such legendary firms as Tudor Investments.


For Financial Advisors Who Want To Avoid The Industrywide Slowdown

Source: Investor’s Business Daily

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