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

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?



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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10 Tuesday AM Reads

My two-fer-Tuesday morning train reads:

• 4 Reasons Microsoft Wasted $26.2 Billion To Buy LinkedIn (Forbes) see also How Microsoft Thinks Office Can Help LinkedIn and Vice Versa (Bloomberg)
• The Most Pessimistic Bull Market in History Instead of chasing growth and profits, investors this year have bought into safety (WSJ)
• A Brief Introduction to Pro-Holocaust Twitter (The Atlantic) see also To Beat Anti-Semitic Trolls Online, Some Co-Opt Their Weapons and Mock Them (NYT)
• Dunning-Kruger Effect Explains Donald Trump’s Popularity (Politicosee also 100 greatest descriptions of Donald Trump’s hair ever written (Washington Post)
• The Cost Of The B-21 Bomber Is Secret For Security Reasons, Which Is Convenient (Foxtrot Alpha) see also How Senators Quietly Voted to Keep Bomber Costs Secret (Roll Call)

What are you reading?

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Americans Fall Out of Love with Owning Stocks

Before the Great Recession, almost two-thirds of Americans owned stocks. That number has since fallen to a little more than half, as you can see from the chart below:


This is an important development with ramifications for retirement planning, demographics and income inequality.

First, a little history: Since late in the last century, one of the defining developments of equity markets has been how new technology and competition democratized investing. We can trace this back even further, to May 1, 1975, when the brokerage industry had to stop charging fixed commissions and start competing on the basis of price.

Trading, research and market commentary moved online in the 1990s. Soon after, a large part of the adult population came to believe that: a) they should be in the market;  b) they had the skills to pick stocks and/or time markets; c) everyone was going to get rich. Recall the Discover brokerage commercial in which a tow-truck driver, who by implication had struck it rich in the market, owned an island-nation? In 60 seconds the ad captured all the giddiness and naivete of that era.

Call it the revenge of the Dunning-Kruger effect — that the least competent are the most certain of their skills. Reality long ago intruded on all that false confidence: The dot-com collapse, the housing boom and bust, the commodities rise and fall, the Great Recession, and then to add insult to injury, a tripling of equities since the March 2009 lows. These events have disabused most amateurs of their belief in their investing prowess. Is the rise of indexing and passive investing any surprise?

Just as many former renters briefly became homeowners during the housing boom, only to return to renter status, so too did many stock-market dabblers take what was left of their capital and go home. Sure, more than half of American households still own equities, but for most of those investors it’s a modest amount (and the other half owns precisely zero); about two-thirds of equity ownership is held in the top 5 percent of portfolios. The top 20 percent owns 85 percent of all financial assets, according to the Levy Institute; the Economic Policy Institute is even more specific at 87.2 percent. Income gains have been even more skewed toward the top.

The social ramifications of this are profound, though the implications for financial markets are more nebulous. For the most part, equity ownership has always been concentrated among the wealthy. Will increasing ownership concentration have an effect on markets? It might, though it isn’t clear how.

However, there are good reasons to be concerned about the decrease in market-participation rates:

  • The decline of equity ownership reflects a failure by too many Americans to save, which portends untold trouble amid the looming retirement of the baby boom generation.
  • Income inequality is a burgeoning issue in the U.S. (and globally). Declining rates of stock ownership are a possible sign that the chasm is widening; this might increase the possibility of social and political upheaval.
  • Politics and policy are being broadly influenced by a middle classthat sees itself falling behind and unable to catch up. Look no further than the present presidential elections for manifestations.

There is a corollary issue — stocks are primarily owned by people who tend to be wealthier, male and white. This is a topic worthy of another column entirely.

In the meantime, falling equity ownership may well point to very big problems down the road.



Originally: The Thrill Is Gone From Owning Stocks

10 Wednesday AM Reads

Our early morning train reads, brought to you directly without a middle man taking 10% of our links:

• The real reason the Fed is eager to raise interest rates now (Quartzsee also Onto The Next Question (Tim Duy’s Fed Watch)
• AUM Growth Is Hedge Funds’ #1 Goal (CIOsee also State Pensions Funding Gap: Challenges Persist (Pew Trusts)
• How To Tell Good Studies From Bad? Bet On Them (FiveThirtyEight)
• Are You Superstitious? Are You Stupid? (Bloombergbut see Dunning-Kruger in Groups (NeuroLogica)
• The Manual Gearbox Preservation Society: Do You Drive Stick? Fans of Manual Transmission Can’t Let Go (WSJ)

Catch my dulcet tones this am co-hosting Bloomberg Surveillance from 7 to 10 am.

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