Not Stupid Wins

As a kid, among my first sports memories is coming home from church to see Jim Brown running roughshod over the rest of the NFL.

Brown was only the sixth pick in the 1957 draft, which means that five teams passed on the greatest player of all-time (in two different sports). There have been many bigger draft misses. For example, Tom Brady was the 199th pick of the 2000 draft, selected after the likes of quarterbacks Giovanni Carmazzi, Chris Redman, and Spergon Wynn, drafted by the Browns.

Of course, Spergon is far from the Browns’ worst QB draft disaster. The failed quarterbacks taken by the Browns in the first round alone is a long list (* number one overall): Harry Agganis, *Bobby Garrett, Mike Phipps, *Tim Couch, Brady Quinn, Brandon Weeden, and Johnny Manziel. The most recent top (overall) pick, Baker Mayfield, remains promising, but there are no first-round successes to date.

Spoiler alert: Drafting NFL players is wildly difficult and inexact.

The Browns are likely to pick in the middle of the upcoming 2020 draft, perhaps 14th. Suppose you are the GM of the Browns and you’re preparing for the draft and you own that 14th pick. You look at a player the scouting consensus says is the 24th best player and think he’s better than that — perhaps the 4th best player. By contrast, the NFL consensus on another player is that he’s the 14th best player but you think he’s only the 28th best. If you’re right about these players, what does that gain you when the draft is held?

If the underrated player is available when your turn comes along, you can snap him up for an effective gain of ten spots. If you’re right, you get the 4th best player with the 14th pick (or look to trade down to get additional assets). Of course, since everybody else is scouting too, you may not be the only one who recognizes the underrated player’s true value. Anybody with a pick ahead of you can steal your thunder. If that happens, your being smart didn’t help a bit.

If the overrated player is available when your turn comes up (in theory, he should be, because he’s the consensus 14th pick and you’re picking 14th), you’re going to pass on him, because you know he’s not that good. If you hadn’t done the scouting and done it right, you would have taken him with your 14th pick and suffered an effective loss of 10 spots by getting the 24th best player with the 14th pick. In that case, then, avoiding a mistake (not being stupid) helps to the tune of 10 draft slots.

Moreover, with the overrated player, it doesn’t matter if other teams scouted him correctly. You’re helped by avoiding him no matter what. Recognizing the undervalued player (being smart) only helps when you’re alone in your recognition. Recognizing the overrated player (avoiding a mistake) always helps. The upshot: You gain more by not being stupid than you do by being smart (cf. Michael Mauboussin’s “paradox of skill”). Smart gets neutralized by other smart people. Not being stupid always helps.

The same principle can be demonstrated mathematically (h/t Phil Birnbaum here). Gather 10 people and show them a jar that contains equal numbers of $1, $5, $20, and $100 bills. Pull one out, at random, so nobody can see, and auction it off. If the market is efficient, the bidding should top out at just below $31.50 (how much less will depend on the extent of the group’s loss aversion), the value of the average bill {(1+5+20+100)/4}.

If you repeat the process but this time let two of the ten prospective bidders see the bill you picked, what happens? If you picked a $100 bill, the insiders should be willing to pay up to $99.99 for the bill. Neither of them will benefit much from the insider knowledge. However, if it’s a $1 bill, neither of the insiders will bid. Without that knowledge, each of the insiders would have had a one-in-ten chance of paying $31.50 for the bill, suffering a loss of $30.50, and would have suffered a loss in 75 of 100 cases. On an expected value basis, each gained $3.05 from being an insider. Avoiding an error matters more than making a smart decision. Once again, you gain more by not being stupid than you do by being smart.

As Charley Ellis famously established, investing is a loser’s game much of the time (as I have also noted before) – with outcomes dominated by luck rather than skill and high transaction costs. If we avoid mistakes we will generally win. We all want to be Michael Burry, an investor who made a fortune because he recognized the mortgage bubble in time to act accordingly. But becoming Michael Burry starts by not being Wing Chau, an institutional mortgage investor of Lawn Chair Larry foolishness who got crushed when the market collapsed. In fact, we all suffered when the real estate bubble burst. When the error quotient is really high, our risks grow exponentially.

Avoiding a mistake – not being stupid – helps more than being smart does. That reality should manifest itself in our decision-making in at least three ways.

First, Do No Harm

Late in last season’s infamous NFC Championship matchup between Los Angeles and New Orleans, the Rams got to the Super Bowl in large measure due to a clear missed pass interference call. With the game tied in the last two minutes of the fourth quarter, the Saints were driving when the Rams’ Nickell Robey-Coleman barreled into the Saints’ Tommylee Lewis before a Drew Brees pass arrived near the goal line.

The NFL admitted the obvious error and made a significant change in the NFL’s replay rules to allow those sorts of errors to be corrected, but not in time to help the Saints.

The Saints faced another obvious blown call when they next met the Rams earlier this season. My younger son’s friend and college teammate, four-time Pro Bowler Cameron Jordan of the Saints, recovered a fumble and raced 87 yards for an apparent touchdown in that game, but the officials ruled they had blown the play dead before reversing the call via replay.

The Saints were awarded the ball at the point of the fumble recovery after replay. However, the return was negated because the play was whistled dead on the field.

“Normally, you let the play happen,” Jordan said afterwards. “The referee usually tells you, ‘Let the play happen and go back and review the play.’”

This year’s Saints officiating controversy is a good example of what Amazon calls “walking through a one-way door” (h/t Brendan Mullooly and his excellent recent post). Amazon tries to avoid making “choices that are hard to reverse or extend” – an idea similar to the medical principle, “First, do no harm.” Had the play been allowed to go ahead, the touchdown would not have been lost. On the other hand, allowing the play to continue wouldn’t have prevented the officials from correcting the call had the “fumble” actually been an incomplete pass.

Once again, error avoidance provides a better outcome than making a good decision.

“First, do no harm” (Latin: Primum non nocere) is a part of many modern versions of the Hippocratic Oath. Its non-maleficence is in tension with its frequent corollary, beneficence. Ultimately, the injunction is a guideline rather than an immutable law, demanding that physicians balance of risk and benefit for the tests and treatments they recommend and reminding them that they should neither overestimate their capacity to heal, nor underestimate their capacity to cause harm. In other words, it may be better to do nothing rather than intervening and potentially causing more harm than good – especially since it is clear that avoiding error is more powerful than taking action. Every decision should be considered in light of the consequences of our being wrong.

Our default human response tends to be along the lines of “Don’t just stand there, do something.” Many times, better advice would be, “Don’t do something, just stand there.”

First, do no harm.

Make Fewer Decisions

People in many organizations are often assigned arbitrarily to individual cases: appraisers in credit-rating agencies, insurance adjusters, physicians in emergency rooms, underwriters of loans and insurance, and many more. Organizations and those served by them expect general consistency in these instances. Similar cases should be treated similarly, especially by alleged experts. Yet they are not. For example, professionals utilizing the same criteria provide highly variable stock valuations and financial audit results.

Similar cases are not even evaluated similarly by the same person. For example, when software developers were asked on different days to estimate the completion time for a given task, the hours they projected differed by 71 percent, on average. And when pathologists made separate assessments of the severity of biopsy results, the correlation between their ratings was only .61 (out of a perfect 1.0).

Since our decision-making is innately flawed and prone to error (on account of both bias and noise), one obvious conclusion is that we should make fewer decisions. The Nobel laureate Daniel Kahneman is the world’s leading expert on human error. He makes the following helpful suggestion.

“Algorithms beat individuals about half the time. And they match individuals about half [the] time.* There are very few examples of people outperforming algorithms in making predictive judgments. So when there’s the possibility of using an algorithm, people should use it. We have the idea that it is very complicated to design an algorithm. An algorithm is a rule. You can just construct rules.”

We should create automated decision engines and implement them whenever and wherever possible. And if we cannot create an automated, algorithmic response, we should try to simulate one.

“Train people in a way of thinking and in a way of approaching problems that will impose uniformity,” Kahneman says. Checklists are a great example of this approach.

Automate whenever possible. Systematize. Make fewer decisions.

Choose Kind

My darling bride teaches fifth grade. She opens each school year with Wonder, R.J. Palacio’s rare gem of a novel (and recently a major motion picture). It’s beautifully written and populated by characters who linger in your memory and heart. It features August Pullman, a 10-year-old boy who likes Star Wars and Xbox, ordinary except for his jarring facial anomalies. Homeschooled all his life, Auggie heads to public school for fifth grade and he is not the only one changed by the experience – something we learn about first-hand through the narratives of those who orbit his world. At his new school, Principal Dyer teaches an important lesson, emphasized by Mr. Browne to his students on the first day of school, “When given the choice between being right or being kind, choose kind.”

Moreover, as Carl Richards has noted, nice costs less and provides better returns. Principal Dyer’s precept is even consistent with the ethos of Road House.

Conceptually, nearly all of us will concede that we make mistakes. But we’re always hard-pressed to come up with current examples.

Current culture, and especially digital culture, is utterly polarized and ultimately invested in its own side’s rightness. It’s “us versus them.”

Almost nobody is convinced by the constant appeals to virtue and rightness that permeate our culture and no argument is really invited. Articles, segments, posts, and tweets are largely performance art for the already committed – to reinforce existing predilections in exchange for attention, adulation, and likes. Cable news and talk radio don’t exist to inform so much as to confirm and applaud the rightness of their various audiences, which will eagerly punish those deemed insufficiently pure. Twitter largely exists to provide a battlefield to attack and “own” the dreaded other, often anonymously.

It’s astonishing for a culture to have so much invested in being moralistically right while having such an enormous proclivity for being wrong. Note the following remarkable request for advice.

“I’m a 28-year-old creative type working in the Internet biz, eking out a pittance with blog work. I have no savings, not much in the bank, and no work on the horizon, and have been seriously single for seven years now – ouch! I’m trying to stay hopeful and just want a little peek into the future to keep me going. So, I ask you, dearest E. Jean, should I spend $250 on a highly respected astrologist? (She said my friend would meet an amazing man, and it happened!) Can’t I treat myself just this once?”

It isn’t hard to see many, many bad decisions in the advice-seeker’s future.

We humans are shockingly prone to bad ideas, ideas that escalate to terrible decisions, and then metastasize into actions that undermine, damage, or even ruin our lives. We’d all like to think that we’re a lot better off than the letter-writer above, and most of us probably are, but vanishingly few of us have a consistently good track record of decision-making and none of us is as good as we think we are. Even when we’re on the straight and narrow path to success, we are prone to wander. None of us is unbroken, unscathed, or unhurt.

We can’t seem to help ourselves.

Because we are so wrong, so often, and because avoiding error provides more benefit than being right does, when we have the choice between being right and being kind, we should choose kind. Every. Single. Time.

In any dispute between being smart and not being stupid, not stupid wins … by a lot.

 

__________

* People have competed against algorithms in hundreds of contests of accuracy over decades, in tasks ranging from predicting the life expectancy of cancer patients to predicting the success of graduate students. Algorithms beat humans about half the time, and approximately tie with the humans in the other half. Ties should also count as victories for the algorithms, because they are much more cost-effective.

9 thoughts on “Not Stupid Wins

  1. Pingback: These Are the Goods - The Irrelevant Investor

  2. Pingback: These Are the Goods | Financial Chickens

  3. Pingback: Opening Bell 23.12.2019 - StockViz

  4. Pingback: Tim’s Top Links – 12/23/19 | Living With Money

  5. Pingback: The Weekend Starts Here.... - The Financial Bodyguard Blog Site

  6. Pingback: Top Ten Behavioral Biases, Illustrated #10: Often Wrong But Never in Doubt (Bias Blindness) | Above the Market

  7. Pingback: Smooth is what we aim for - Occam Investing

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s