Search results for: Dunning Kruger

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

Want to receive our daily reads in your inbox? Sign up here!



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?

Continues here

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.

Continues here


10 Wednesday AM Reads

Wakey wakey, time to shake & bakey. Your morning after the rout the day before train reads:

• Most Downloaded SSRN Paper Ever Is All About Market Timing – and it suggests investors should currently be in cash (Bloomberg)
• How Much Diversification is Necessary? (A Wealth of Common Sensesee also The economics of the stock market is simple really: buy and hold (The Independent)
• I Can’t Define Short-Term Silliness but, Like Justice Stewart, I Know It When I See It (AQRbut see 5 Forces Driving the Global Stock Selloff (Moneybeat)
• Economics Has Math Problem (BV)
• Lessons from Dunning-Kruger (NeuroLogica)

Continues here


Forecasting is Marketing . . .

It’s time to market forecasters to admit the errors of their ways
Barry Ritholtz
Washington Post, January 18, 2015



I come not to praise forecasters but to bury them.

After lo these many years of listening to their nonsense, it is time for the investing community — and indeed, the seers themselves — to admit the error of their ways. Most forecasters are barely cognizant of what happened in the past. And based on what they say and write, it is apparent (at least to this informed observer) that they often do not understand what is occurring here and now.

So there’s no reason to imagine that they have the slightest clue about the future.

Economists, market strategists and analysts alike suffer from an affinity for making big, frequently bold — and most often, wrong — pronouncements about what is to come. This has a pernicious impact on investors who allow this guesswork to infiltrate their thinking, never for the better.

I have been beating this drum for more than a decade. What say we finally put a fork in Prediction, Inc.?

There is a forecasting-industrial complex, and it is a blight on all that is good and true. The symbiotic relationship between the media and Wall Street drives a relentless parade of money-losing tomfoolery: Television and radio have 24 hours a day they must fill, and they do so mostly with empty-headed nonsense. Print has column inches to put out. Online media may be the worst of all, with an infinite maw that needs to be constantly filled with new and often meaningless content.

Just because the beast must be fed does not mean you must be dragon fodder. (More on this later.)

The other partner in this mutually beneficial dance is the financial industry. Forecasting is simply part of its marketing strategy. There are two principle approaches to meeting the media’s endless demand for unfounded guesses about the future. Let’s call them a) Mainstream and b) Outlier.

The Mainstream strategy is simple: Take the average annual change in whatever the subject at hand is and extrapolate forward a year. Voila! You have a mainstream forecast. If you are talking about equities, predict an 8 to 10 percent gain in the Standard & Poor’s 500-stock index. For economic data, project out the past 12 months forward. You can do the same for gross domestic product, unemployment, commodity prices, bonds, inflation, just about anything with a regularly changing data series. If you are feeling puckish, you can shade the numbers slightly up or down to separate your prediction ever so slightly from the rest of the pack — just to keep it interesting. As Lord Keynes once said, better to fail conventionally than succeed unconventionally.

A perfect example is the recent collapse in oil prices. Having completely missed the 50 percent drop that occurred over 2014, analysts are now tripping all over themselves to forecast $40, $30, $20 per barrel in 2015. Since their prior guesswork completely missed the biggest energy story in decades, why should any of us care about their current guesswork?

Then there is the Outlier approach, where a wildly un­or­tho­dox forecast is made. The prognosticator predicts the Dow Jones industrial average at 5,000 when it’s three times that, or hyper-inflation, or $10,000 gold, or a 1 percent yield on the 30-year treasury bond, or a collapse in the Federal Reserve’s balance sheet.

If it comes to pass, the forecaster is feted as a rock star. If not, most people forget. (Although some of us actually track these outlier forecasts). Those in the prediction industry are pernicious survivors. They understand how to play on the human psyche to great advantage. Like the cockroach, they adapt well to conditions of chaos or uncertainty.

There is a flaw in the human wetware that leads to a demand for even more (bad) predictions. The evolutionary propensity that humans suffer from is the desire for specific predictions from self-confident leaders.

This is demonstrated in a wealth of academic data about forecasting track records. Research has shown there is a high correlation between a forecaster’s appearance of self-confidence and believability. Unfortunately, there is an inverse correlation with accuracy, for reasons revealed by the Dunning and Kruger studies on metacognition and self-evaluation. Same with specificity: Studies show that the more precise a prediction, the more likely it will be believed, and the less likely it is to be right. These (and other) factors set up viewers to have the most faith in the people who are least likely to be right.

Perhaps the biggest issue of all is the most obvious: Human beings, in general, stink at predicting the future. All of you. History shows us that people are terrible about guessing what is going to happen — next week, next month, and especially next year.

Why is that? In my last column, I noted that people are error machines, a mess of biases and emotions. They seek out, read and remember only that which agrees with their thinking.The experts are no better than the public at large. Consider the comprehensive examination of expert forecasting performed by Philip Tetlock, professor of psychology and management at the University of Pennsylvania. “Expert Political Judgment” is the book that came out of a study of 28,000 forecasts made by hundreds of experts in a variety of different fields. His findings?“Surveying these scores across regions, time periods, and outcome variables, we find support for one of the strongest debunking predictions: it is impossible to find any domain in which humans clearly outperformed crude extrapolation algorithms, less still sophisticated statistical ones.”

In other words, expert forecasts are statistically indistinguishable from random guesses.

What should investors do instead of paying attention to these unsupported, mostly wrong, exercises in futility called forecasting? I suggest three simple things:

1) Have a well-thought financial plan that is not dependant upon correctly guessing what will happen in the future.

2) Have a broad asset allocation model that is mostly passive indexes. Rebalance once a year.

3) Reduce the useless, distracting noise in your media diet.

It is important for investors to understand what they do and don’t know. Learn to recognize that you cannot possibly know what is going to happen in the future, and any investment plan that is dependant on accurately forecasting where markets will be next year is doomed to failure.

Never forget this simple truism: Forecasting is marketing, plain and simple.

Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture

15 Biases That Make You A Dumb Investor

I am off to Toronto, where I am presenting at the annual CFA forecasting dinner. (I am the counter-programming, which means I get to explain why you humans are so bad at forecasting.

From Morgan Housel, here are several cognitive biases that cause you to do dumb things with your money. Be sure to check out the entire article.

15 Biases That Make You Do Dumb Things With Your Money
1. Normalcy bias
2. Dunning-Kruger effect
3. Attentional bias
4. Bandwagon effect
5. Impact bias
6. Frequency illusion
7. Clustering illusion
8. Status quo bias
9. Belief bias
10. Curse of knowledge
11. Gambler’s fallacy
12. Extreme discounting
13. Ludic fallacy
14. Restraint bias
15. Bias bias

I like Nobel Prize winning cognitive psychologist Daniel Kahneman’s take on this: He once said, “I never felt I was studying the stupidity of mankind in the third person. I always felt I was studying my own mistakes.”



15 Biases That Make You Do Dumb Things With Your Money
Morgan Housel
Motely Fool, August 30, 2013