About Bob Seawright

Robert P. Seawright is the Chief Investment & Information Officer for Madison Avenue Securities, a boutique broker-dealer and investment advisory firm headquartered in San Diego, California.

Jonathan Bernier and Confabulation

Friday was the first anniversary of the death of Nelson Mandela, the South African political giant and anti-apartheid leader who spent 27 years in prison for his activism before eventually being released and elected to become the country’s first black head of state. The NBA’s Toronto Raptors, and more specifically GM Masai Ujiri (who was born and raised in Nigeria), hosted a celebration called “The Giant of Africa” that evening to commemorate Mandela and to raise money for charity. Ujiri had asked the NBA over the summer to be able to host a home game on the anniversary; the league agreed and provided LeBron James and the Cleveland Cavaliers as opponents. The event was a star-studded affair and many celebrities were asked about their thoughts on Mandela’s life and legacy. One of those was the unfortunate Jonathan Bernier of the NHL’s Toronto Maple Leafs.

Obviously, even though “everybody knows him” and he was “a tremendous guy” who “changed a lot,” Nelson Mandel wasn’t a hockey player. It’s easy to laugh at. To be fair, it probably isn’t reasonable to expect a hockey player to have a lot of knowledge about history and world events. And, like many professional athletes, he is no doubt asked to attend many charity functions for which he doesn’t have a lot of background. He has also apologized, saying “I got flustered with the red carpet and I was nervous.” But that doesn’t make the gaffe any less outrageous. He didn’t have a clue about what he was being asked about and, clearly, he shouldn’t have tried to fudge his way through the interview. But what he did was much closer to what we all do than we’d like to think. Continue reading

Confirmation Bias: A CFB Twitter Accounting

Confirmation Bias 4Confirmation bias is our tendency to notice and accept that which fits within our pre-existing commitments and beliefs. If you doubt its existence, power and importance, you might look at the tweets on college football from this fall that follow (I wrote about it in the college basketball context here). Even if you don’t doubt confirmation bias, looking at these tweets is still a lot of fun. Everyone tends to think that everyone else is out to get them and their team. As Paul Simon put it in The Boxer, “…still a man hears what he wants to hear and disregards the rest….“ By inference, at least everybody seems to agree that they hate ESPN!

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It’s the waiting part that’s hard

Hedge Funds 3CalPERS, the highly influential California public employee pension agency, announced in September that it would no longer invest its dollars via hedge funds. That decision is not altogether surprising in that the annualized rate of return of the hedge funds in the CalPERS portfolio over the past decade was only 4.8 percent. The behemoth pension plan sponsor was careful to note that not all hedge funds are bad, but that “at the end of the day, judged against their complexity, cost, and the lack of ability to scale at CalPERS’ size,” the hedge fund investment program “is no longer warranted.”

In essence, CalPERS recognized and acted upon what should be apparent to everyone: hedge fund returns have simply not lived up to their hype. As Victor Fleischer famously put it, “hedge funds are a compensation scheme masquerading as an asset class.”  Continue reading

Bias Blindness Explained

Earlier today, I posted the following on Twitter, whereby I offered a 140 character explanation of bias blindness.

Jason Zweig, the wonderful columnist for The Wall Street Journal, added the following (and I agreed).

As Jason explained via email, “conscious control of unconscious bias is impossible…on an ad-hoc basis.”  Our best hope, we agree, is by instituting careful, blanket policies and procedures to combat them.

As Daniel Kahneman also argues, organizations are more likely to succeed at overcoming bias than individuals. That’s partly on account of resources, and partly because self-criticism is so difficult. As I have argued repeatedly, perhaps the best check on bad decision-making we have is when someone (or, when possible, an empowered team) we respect sets out to show us where and how we are wrong. Within an organization that means making sure that everyone can be challenged without fear of reprisal and that everyone (and especially anyone in charge) can be and is held accountable.

But that doesn’t happen very often. Kahneman routinely asks groups how committed they are to better decision-making and if they are willing to spend even one percent of their budgets on doing so. Sadly, as far as I know, he hasn’t had any takers yet. Smart companies and individuals will take him up on that challenge. Those that are smarter will do even more simply because there’s no substitute for good judgment.

The Trouble With Investor Optimism

Investor OptimismIt seems that I forgot to post the online version of my December column for Research magazine. Here’s a taste (but I hope you will read it all).

“In my view, being disappointed by not having the retirement I had hoped for is still preferable to becoming destitute when I’m old(er) and least likely to be able to deal with it effectively. I don’t want to be dependent upon my kids, love them though and as I do.

“Your mileage may vary.”

The Trouble With Investor Optimism

Doing Too Much

It was the worst moment in San Diego Chargers history, even worse than drafting Ryan Leaf (who, coincidentally, was released from prison this week).

On January 14, 2007 I was in the stands with my younger son watching as the Chargers (14-2 in the regular season and widely regarded as the league’s nest team) hosted the New England Patriots in the divisional round of the playoffs. The Chargers had been 8-0 at home, had five All-Pro players and had nine players elected to the Pro Bowl. The day before I had received a certified letter from the Bolts, advising me that I had won a lottery among season tickets holders and would thus be allowed to purchase Super Bowl tickets if (when!) the Chargers advanced there.

But the day didn’t turn out the way I had envisioned.

Marty Schottenheimer foolishly attempted to convert a 4th and 11 at the New England 30 early in the game. The sure-handed Eric Parker muffed a punt, one of four turnovers in all. Drayton Florence head-butted a Patriots player and drew an unsportsmanlike conduct penalty to negate a fumble recovery for the home team. Lots went wrong, but the Chargers still had the lead late. The great LaDainian Tomlinson, who had rushed for 1,815 yards and 31 touchdowns that season, ran for 123 yards and two scores that afternoon and extended the lead to 21-13 via a touchdown run with 8:35 left in the 4th quarter.

McCree FumbleOn the very next series, Tom Brady threw his third pick of the day. The game should have been over, but Marlon McCree tried to return the interception rather than falling to the ground while cradling the football. McCree was stripped of the ball (right); the Patriots recovered and went on to win. When the Pats proceeded to do the silly Shawne Merriman sack dance on the Chargers logo in the middle of the field after the game, it instigated a brawl.

After the game, McCree was unrepentant. “I was trying to make a play,” he said, “and anytime I get the ball I am going to try and score. …[In] hindsight I don’t regret it because I would never try and just go down on the [ground]. I want to score.”

It’s a football cliché, of course, but Marlon McCree simply tried to do too much. It happens in investing all the time too. Continue reading

Kobayashi Maru and the Forecasting Follies

Kobayashi MaruIn the Star Trek universe, the Kobayashi Maru is a Starfleet Academy training exercise for future officers in the command track. It takes place on a replica of a starship bridge with the test-taker as captain. In the exercise, the cadet and crew receive a distress signal advising that the freighter Kobayashi Maru has stranded in the Klingon Neutral Zone and is rapidly losing power, hull integrity and life support.

The cadet is seemingly faced with a decision (a) to attempt to rescue the freighter’s crew and passengers, which involves violating the Neutral Zone and potentially provoking the Klingons into an all-out war; or (b) to abandon the ship, potentially preventing war but leaving the freighter’s crew and passengers to die. As the simulation is played out, both possibilities are set up to end badly. Either both the starship and the freighter are destroyed by the Klingons or the starship is forced to wait and watch as everyone on the Kobayashi Maru dies an agonizing death.

The objective of the test is not for the cadet to outsmart or outfight the Klingons but rather to examine the cadet’s reaction to a no-win situation. It is ultimately designed as a test of discipline and character under stress.

However, before his third attempt at the test while a student, James T. Kirk surreptitiously reprograms the simulator so that it was possible to rescue the freighter. Continue reading

Chaos is a friend of mine

Chaos is a friend of mineOver 50 years ago, Edward Lorenz created an algorithmic computer weather model at MIT to try to provide accurate weather forecasts. During the winter of 1961, as recounted by James Gleick in Chaos: Making a New Science, Professor Lorenz was running a series of weather simulations using his computer model when he decided to repeat one of them over a longer time period. To save time (the computer and the model were primitive by today’s standards) he started the new run in the middle, typing in numbers from the first run for the initial conditions, assuming that the model would provide the same results as the prior run and then go on from there. Instead, the two weather trajectories diverged on completely separate paths.

After ruling out computer error, Lorenz realized that he had not entered the initial conditions for the second run exactly. His computer stored numbers to an accuracy of six decimal places but printed the results to three decimal places to save space. Lorenz had entered the rounded-off numbers for his second run starting point. Astonishingly, this tiny discrepancy altered the end results dramatically.Lorenz

This finding (even using a highly simplified model and confirmed by further testing) allowed Lorenz to make the otherwise counterintuitive leap to the conclusion that highly complex systems are not ultimately predictable. This phenomenon (“sensitive dependence”) came to be called the “butterfly effect” because a butterfly flapping its wings in Brazil can set off a tornado in Texas. Lorenz built upon the work of late 19th century mathematician Henri Poincaré, who demonstrated that the movements of as few as three heavenly bodies are hopelessly complex to calculate, even though the underlying equations of motion seem simple.

Accordingly and at best, complex systems – from the weather to the markets – allow only for probabilistic forecasts with significant margins for error and often seemingly outlandish and hugely divergent potential outcomes. Continue reading