Alternatives to Being an Evidence-Based Financial Advisor

Evidence-basedThere is a new and growing movement in our industry toward so-called evidence-based investing (which has much in common with evidence-based medicine). As Robin Powell puts the problem, “[a]ll too often we base our investment decisions on industry marketing and advertising or on what we read and hear in the media.” Evidence-based investing is the idea that no investment advice should be given unless and until it is adequately supported by good evidence. Thus evidence-based financial advice involves life-long, self-directed learning and faithfully caring for client needs. It requires good information and solutions that are well supported by good research as well as the demonstrated ability of the proffered solutions actually to work in the real world over the long haul (which is why I would prefer to describe this approach as science-based investing, but I digress).

The obvious response to the question about whether one’s financial advice ought to be evidence-based is, “Duh!” But since all too few in the financial world practice evidence-based investing, we ought carefully to look at the possible alternatives to being an evidence-based advisor. Here is a baker’s dozen of them for your thoughtful consideration. If I’ve missed any I’d appreciate your letting me know. Continue reading

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“So you’re telling me there’s a chance”

As I pointed out in my previous post, we can only advance scientifically indirectly — via falsification — rather than by confirmation. Correlation does not imply causation. And that rankles us. We want certainty.

But, to be clear, some things are so well supported that we can assume them to be true even while acknowledging that falsification remains possible, as the clip below so humorously illustrates.

Part of the problem is that we are so bad at math and at probability. Another part is that we misunderstand what theory means in science and, as in the video, overstate the amount of hope our discredited ideas truly justify.

Principles of Economics (Translated)

Yoram Bauman

Yoram Bauman

Yoram Bauman has a Ph.D. in economics, but is best known as the “stand-up economist.” Bauman’s excellent post this week, Top 11 Funniest Papers in the History of Economics, adapted from New Developments in Economics Education, reminded me (yet again) of his terrific video riffing on Greg Mankiw‘s famous (and expensive!) textbook, Principles of Economics. I’ve seen it a bunch of times and laugh out loud every time…a lot. Enjoy.

A rap version of Mankiw’s text is available here. An animated version is below.

Bauman is also the co-author of the Cartoon Introduction to Economics (volumes I & II) and the just-released Cartoon Introduction to Climate Change

Inflation in Samadhi?

Generalissimo Francisco Franco may still be hanging on in his fight to remain dead in Spain, but in India some apparently do things a bit differently. The family and followers of one of India’s wealthiest Hindu spiritual leaders are fighting a protracted legal battle over whether he is dead or simply in a deep state of meditation.

His Holiness Shri Ashutosh Maharaj, the founder of the Divya Jyoti Jagrati Sansthan religious order, with a property estate said to be worth a fortune, died of a heart attack in January, according to his wife and son. However, the disciples at his ashram have refused to let the family take his body for cremation because they claim he is still alive, alleging that he remains in a deep Samadhi (meditative state). Meanwhile, his followers have put the body into a commercial freezer at the ashram for safe-keeping until he “awakens.”

Local police initially confirmed his death, but the area High Court dismissed the police report, asserting that the determination of the guru’s death was a spiritual matter and that the his followers could not be forced to believe he is dead. The wife and son have since filed a court application calling for an investigation into his death and for his body to be released for cremation.

Since more than a few pundits have been calling for significant inflation for a number of years now (with more than a few having offered projections of hyper-inflation) without it having turned up so far, I wonder if perhaps inflation has been alive (in not well) during that period and just meditating in a freezer somewhere. It certainly appears to have been a religious (or at least ideological) matter for many.

To be fair, the behavior of U.S. inflation during the financial crisis has indeed been “deeply puzzling,” as noted by Christina and David Romer, co-directors of the National Bureau of Economic Research’s Monetary Economics Program in a report earlier this year. “We remain far from having a full understanding of the recent behavior of inflation.” Moreover, predictions of inflation will eventually come to pass.

Still, it makes me wonder….

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World Leaders

LeadersThis fascinating map (from The Doghouse Diaries via The Matador Network) lists things each country leads the world in. I encourage you to look at the entire map series from The Matador Network (there are other good series there too) and to follow some of the links therein, such as to NatGeo re rising sea levels, The Washington Post for another map series, Business Insider for its map series, and more.

Optimism Bias at Work

forecastESPN has 32 team bloggers, and each has predicted the 2014 season record for the team he or she (they aren’t all guys) covers. They are remarkably positive on the chances for each team next season, forecasting that, in the aggregate, NFL teams will win far more games than they lose, quite impossibly going 290-222 (as reported by The Big Lead). Again. Last year, also as reported by The Big Lead, they collectively predicted that NFL teams would go 283-229.

It’s easy to assume that we’re witnessing the collective math or probability suckage that so easily beset us. But that would be an erroneous conclusion since ESPN is careful to inform us that each team’s blogger made his or her prediction independently and only made a guess as to his or her covered team. Instead, what we’re seeing is an obvious example of how bad we are at forecasting and how susceptible we are to optimism bias. In general, it’s a lot more fun — and you get a lot more readers — when covering a winning rather than a losing team).

Remarkably, only five teams are forecast as having a losing record this year, with Washington (at 7-9) the only sub-.500 team in the entire NFC. Three teams in the powerful NFC West are expected to go 12-4. My Chargers are even expected to go 10-6 (don’t we wish). But at least the blogger for the Cowboys seems to have (finally?!) learned his lesson as what was once America’s Team is predicted to go 8-8 (yet again). And, happily, the hated Raiders are said to be a 5-11 team. There’s at least some reality-based thinking going on at ESPN!

Fans are well-known to be excessively optimistic in general and especially so before the season begins. It seems clear, yet again, that the alleged “experts” are too.

Worth Watching

An ESPN cameraman (or woman) caught some Phillies fans taunting Dan Uggla of the Braves Monday Night but then being rudely interrupted by Uggla’s hitting a game-winning grand slam in the ninth inning. Deadspin took it a bit further by creating the video below using music (Take This Lying Down by The Lucksmiths) and extreme slow motion. It’s fantastic. Enjoy.