AAII Citations

In conjunction with my speaking engagement with and for the American Association of Individual Investors (Los Angeles), I am listing here some handy resources and citations relating to my presentation. Note that many of these resources contain links themselves that offer additional, helpful research and information.

• Thinking Fast and Slow
• The Little Book of Behavioral Investing
• 9.11 and the Narrative Fallacy
• Stories vs. Statistics
• The Semmelweis reflex
• Investors’ 10 Most Common Behavioral Biases
• The Greatest Risk of All
• Bias Blindness
• Bias Blindness and Political Polarization
• Perception and misperception of bias in human judgment
• Top Ten Ways to Deal with Behavioral Biases
• Objectivity in the Eye of the Beholder: Divergent Perceptions of Bias in Self Versus Others
• They Saw A Game: A Case Study
• Cargo Cult Science
• The case for motivated reasoning
• How Not to Be Data-Driven
• CFA Conference: Daniel Kahneman
• The Value Project
• Reckoning with Risk
• Quantitative Analysis of Investor Behavior 2013
• Why Inexperienced Investors Do Not Learn: They Do Not Know Their Past Portfolio Performance

Librarius Booker, Confabulation and Choice Blindness

Jimmy Kimmel has a terrific regular feature on his show he calls Lie Witness News, whereby his crew asks people about non-existent events or people and waits for a series of often hilarious, fabricated responses.  In the recent “Miami Heat edition,” Kimmel’s crew discovered that even those who claimed to be big Heat fans and who lived in Miami knew a lot less about “their” team than they claimed.  These fans were asked what they thought of a whole litany of ridiculous things which did not exist, such as Miami’s peek-a-boo defense (in response to San Antonio’s rhombus offense), back-up point guard MooShu Pork and his being fined for criticizing the officials, Heat coach Eric Estrada, and LeBron James’ painful injury (a bruised vulva). The answers are hysterical.  My favorite is the following about alleged Heat player Libraius Booker.

“He’s gonna get to get a ring.  At the end of the day, Librarius Booker’s gonna have a ring.  A lot of people aren’t gonna have a ring at the end of the day, y’know what I’m saying? Carmelo’s not gonna have a ring.  But Librarius Booker is gonna have a ring.” 

Watch it below.

  

Financial Advice: A Top Ten List

Yesterday, while I was otherwise engaged, Josh Brown threw some fuel on the active v. passive fire:

“Active investors, in the meantime, really can’t say anything. There isn’t a single empirical datapoint backing up the idea that an investor is financially better off paying someone to pick their stocks for them. There are other considerations in favor of active managers – mostly emotional ones involving elbow-rubbing, fancy lunches and alerts – but we’ll leave those aside for now.”

Putting aside the actual substantive argument (my views, including why I advocate some active management, are here and here), advisors routinely tell me that if they used index funds, their clients wouldn’t need their services, consistent with the Dilbert cartoon above.  I disagree vehemently.  Here’s my top ten list of reasons why.

Shifting Baseline Syndrome

A shifting baseline is a change with respect to how a system is measured or evaluated, usually against previous reference points (baselines), which themselves may represent significant changes from even earlier states.  For example, the price of coffee has seen a very significant baseline shift. A cup of coffee may have only cost a nickel in the 1950s, but with the advent of “premium coffee, the baseline is much higher today — $1.38 for brewed coffee and $2.45 for an espresso-based drink. Few of us look at current coffee prices based on the 1950s model. For most of us, our standard point of reference has moved and moved a lot.

What’s Your Baseline?

I spoke at an excellent conference recently and was on a panel there with two big-time economists.  While I was sitting on the dias listening to my “colleagues,” I couldn’t help thinking about this old gem from Sesame Street.

And I was the “thing” that didn’t belong. 

That said, I was a bit surprised that we had so many areas of substantial agreement because our starting points were pretty different.  Economists look at the investment world somewhat differently from the rest of us.  They come at things from a different place.  Plus, neither of them was American, making our outlooks even less inherently consistent.

Framing

According to the Major League Baseball Rulebook, Rule 2.00:

“The strike zone is that area over home plate, the upper limit of which is a horizontal line at the midpoint between the top of the shoulders and the top of the uniform pants, and the lower level is a line at the hollow beneath the kneecap. The strike zone shall be determined from the batter’s stance as the batter is prepared to swing at a pitched ball.”

But what looks at least reasonably clear on paper is anything but in practice.  Indeed, far from every strike called meets the above criteria (not that this is news to any baseball fan). This reality is based — in no small measure — upon how each pitch is “framed” by the catcher.

Bias Blindness

Try this experiment sometime. Ask an impartial observer – someone with no connection to any of the players – to go with you to a youth sporting event involving one of your children or grandchildren. Try to behave as you normally would but also watch and listen carefully, particularly to the conversations, attitudes and actions of the parents.

Then go to a game involving no kids or families you know with the same companion. Both of you should again try to be as observant as possible throughout, particularly with respect to the conversations, attitudes and actions of the parents.

After both games are over, discuss what you experienced with the observer — second game first. But read no further until after both games are over, nerves are calmed, tempers cooled and the games discussed. Ask the observer to read this entire entry before the first game and to direct your post-game analysis and conversation accordingly.

Connecting the Dots

It’s a consuming question for all Americans:  Should the FBI, the CIA, Homeland Security and related entities have “connected the dots” about the Tsarnaev brothers and thus been able to prevent the Boston Marathon bombings? 

Explaining the Value Premium

Value has persistently outperformed over the long-term.  Why is that? 

In the most general terms, growth stocks are those with growing positive attributes – like price, sales, earnings, profits, and return on equity.  Value stocks, on the other hand, are stocks that are underpriced when compared to some measure of their relative value – like price to earnings, price to book, and dividend yield. Thus growth stocks trade at higher prices relative to various fundamental measures of their value because (at least in theory) the market is pricing in the potential for future earnings growth. Over relatively long periods of time, each of these investing classes can and do outperform the other.  For example, growth investing dominated the 1990s while value investing has outperformed since. But value wins over the long haul.

Choice

Calvin Miller says that choice is both the gift and the burden of each day.  In his words, it “dams the future.”  I first heard those words spoken and I assumed I had heard “damns the future,” implying that we make poor choices or are faced with impossible options, “damning” us with dreadful consequences.

How choice can damn the future is illustrated by Sophie’s Choice, a novel by William Styron (and a film by Alan J. Pakula) that considers Sophie Zawistowska, a survivor of Auschwitz whose two children, a daughter and a son, perish there.  Near the end of the book, Sophie reveals that upon entering Auschwitz, she was forced to choose which of her children would continue to live and which would immediately be gassed.  Sophie chose her daughter to die, a decision that would forever haunt and torment her, damning her to ultimate destruction.  A “Sophie’s Choice” is thus now an idiom for the necessity of choosing between two unbearable options.  Our choices can indeed damn us.

But Miller’s point was a more subtle (if less dramatic) one.