“That’s What They Offered”

trump-and-sandersBernie Sanders and Donald Trump are strange bedfellows to be sure. But they were the big winners last night when the first primary votes of the 2016 presidential campaign are cast and counted in New Hampshire as each won astonishing and overwhelming victories in their respective party contests. Let’s be clear. They didn’t just win. They each won by huge margins. And their successes have badly embarrassed party leaders and pundits.

These very different candidates have some surprising commonality. They have each found a rich vein of popular (and populist) support as insurgents attacking the insidious corruption wrought by big money in politics. They see the political fight they are waging not as an ideological struggle so much as a class war. They want to gain control of the presidential process and the political parties at its heart by hostile takeover. As they see it, since the system is rigged, only someone not beholden to big-money special interests can make things right. Continue reading

The Great Myths of Investing

GreatMythsAs the great Mark Twain (may have) said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” That’s particularly true in the investment world because we know, to a mathematical certainty, that avoiding errors provides more bang for the buck than making correct calls and generating outperformance. Fixing what we “know for sure that just ain’t so” provides a remarkable opportunity for investment success.

On the other hand, it simply doesn’t make a lot of sense to spend enormous amounts of time and energy looking for a strategy or a manager that might (but probably won’t) outperform by just a little bit. As the great Spanish artist Pablo Picasso put it, “Every act of creation is first of all an act of destruction.” What we want to do is to find the next great investor, the terrific new strategy, the market sectors that are about to heat up or the next Apple. But what we should do is eliminate the things that make it so hard for us to get ahead. Accordingly, I will highlight some of the great myths of investing — ideas that lots of people, alleged experts even, claim to be true and act as as though are true “that just ain’t so.”

There are lots of myths at work in our lives, of course, falsehoods that are often believed and which are used to further a favored narrative. But George Washington didn’t really cut down a cherry tree and wax eloquent about not telling a lie as a consequence. Isaac Newton didn’t come up with his theory of gravity because an apple fell on his head. Columbus didn’t discover that the earth was round (that had been established centuries before). Ben Franklin didn’t fly a kite in a storm and discover electricity. And Einstein never flunked math. If any of these are news to you, I’m sorry to have had to break it to you.

Such myths persist because they “work” in some way. Their story elements — ease of recall, readily adaptability, explanatory power — make them useful and even important.  But utility and truth are hardly the same things and neither are utility and helpfulness.

So here is my list of the top ten great myths of investing. Since they aren’t true and are indeed damaging, if you can eliminate them from your mind and your investment process, your results will necessarily improve. Continue reading

The Maleficent 7

Maleficent 7The Magnificent Seven is a terrific 1960 movie “western” about seven gunfighters hired to protect a small Mexican village from marauding bandits. A re-make is currently in the works and the “original is itself a re-make of Akira Kurosawa’s Japanese classic, Seven Samurai. Meanwhile, Maleficent is the “Mistress of All Evil” in Sleeping Beauty who curses the infant princess to prick her finger on the spindle of a spinning wheel and die before the sun sets on her sixteenth birthday. Today I’m offering up a mash-up from these movies to outline what I’m calling the Maleficent 7 – seven inherent human problems and limitations that impede our ability to make good decisions generally and especially about money. Continue reading

Facts (and Minds) are Stubborn Things

When making his defense of some British soldiers during the Boston Massacre trials in December of 1770, John Adams (later the second President of the United States) offered a famous insight. “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”  Legal Papers of John Adams, 3:269. In a similar vein, Sen. Daniel Patrick Moynihan once said that “[e]veryone is entitled to his own opinion, but not to his own facts.”

I have often warned about our proclivity to and preference for stories to the exclusion of data (for example, here, here and here). Because stories are so powerful, we want the facts to be neatly packaged into a compelling narrative. Take a look at John Boswell‘s delightful send-up of this technique in the TED context below.

 We crave “wonder, insight [and] ideas.” Facts?  Not so much. Continue reading

What you’re vacillatin’ between

Francis Paschal

Francis Paschal

When I was a first-year law student at Duke many years ago, my Civil Procedure professor was the delightfully named J. Francis Paschal. Professor Paschal seemed to like to portray himself as a bit of a good ol’ boy, with a protruding gut, truly dreadful sports jackets, hair slicked and parted just off-center, and a drawl as thick as molasses on a cold day (if not nearly so sweet). That image could not mask a keen mind and a sharp wit. Nor did it hide his erudition — in addition to his credentials in the law, Professor Paschal had a Princeton Ph.D. too.

The good professor led his classes using the Socratic conventions of the day. A student was called upon to answer a series of penetrating and perplexing questions supposedly designed to ferret out the nuances of some legal principle or another but which, in reality, served to demonstrate to a class full of bright and full-of-themselves college graduates that they were out of the minors and into the intellectual big leagues. If we were going to compete at that level, we needed to up our collective game considerably.

One day fairly early in the first semester Professor Paschal called on a woman in the row ahead of me (who I shall kindly refer to — using a pseudonym since she is now a Deputy Attorney General — as “Frieda Clancy”) and asked a typically impossible question. SInce Frieda was a friend, I happened to know that her extremely difficult predicament was actually utterly impossible because she was not prepared for class.  In fact, it wasn’t just that she wasn’t fully prepared (meaning that she had read the required case, all the cases cited therein, the case comments, casebook notes and citations, relevent hornbook and law review materials and anything else we could think of that might be relevant). She wasn’t prepared at all. She hadn’t even read the case at issue.

This was not likely to turn out well. Continue reading

Phi Beta Football Foibles

KAZOn November 24, 1951, Princeton defeated Dartmouth, 13-0, to win its 22nd straight football game and complete a second consecutive undefeated season for what was described, by the great writer John McPhee, as “Phi Beta Football.” In those days, Princeton still used a then-old, direct snap, pure power offense called the single wing even though most college teams were “mating the quarterback to the center of the line in the formation called ‘T.’” It was also the final game for Princeton tailback and legend Dick Kazmaier, the “Maumee Menace,” a future College Football Hall of Fame inductee and McPhee’s roommate. “Kaz” had been pictured on the cover of Time magazine that week (right) and would soon win the Heisman Trophy (the last Ivy League player to do so) in a landslide. But the game that day is not primarily remembered as having capped off an outstanding season and a brilliant career.

Instead, the legacy of that brisk late autumn afternoon contest rests upon two seemingly unrelated matters: allegations of intentionally dirty play by Dartmouth and our inability to perceive reality with any degree of objective accuracy, especially where we have a major emotional investment. Based upon various sources, the primary narrative from the game is that Dartmouth set out to injure Princeton players – particularly Kazmaier – and that after the Princeton star was injured and forced from the game in the second quarter, matters turned increasingly fractious. But that wasn’t the only proffered narrative. Continue reading

A Brain in Doubt Leaves It Out

As I have often argued, we like to think that we see the world as it truly is. Instead, we tend to see the world as we really are. Sadly, that reality is both literal and figurative.

As Nature has reported, if you take a look at the gif below, you’ll discover some really weird stuff about yourself and your brain.

Source: Prof. Michael Bach, University of Freiburg

Source: Prof. Michael Bach, University of Freiburg

Look at any of the yellow dots as the figure moves; it remains present and stationary. If you concentrate on all three yellow dots, they remain in place too. But if you concentrate on the central green dot instead, one or more of the yellow dots will seem to disappear and then reappear intermittently even though they are really there the whole time. Your brain simply doesn’t register their presence sometimes. This optical illusion, called motion-induced blindness, applies to nearly everyone. Continue reading

Hiding in Plain Sight

Phil SmithOver a career that has spanned four decades so far, concertgoers have routinely paid a lot of money to hear Phil Smith play the trumpet. The long-time principal trumpet of the New York Philharmonic retired this summer after 36 years in the orchestra. In his first professional audition, while still a student, he won a place in the Chicago Symphony. While still in his 20s, Phil came to New York following just his second professional audition. According to New Yorker magazine, “For the past thirty-six years, Smith has presided over orchestral trumpet playing, with a resonant, clarion sound and a reputation for never missing a note.” He has been, inarguably, one of the world’s great performers. Continue reading


with-stupidNoah Smith (@Noahpinion on Twitter) made an interesting assertion yesterday about the purpose of argument. Smith began by noting Boston University economist Laurence Kotlikoff’s op-ed in Forbes in which he acts as a concern troll toward New York Times columnist (and noted economist himself) Paul Krugman because Krugman allegedly called Congressman Paul Ryan stupid. To be clear, Krugman’s primary point was not that Ryan is stupid, but that he is crooked, especially as it pertains to his budget proposals. Smith uses this context for looking at arguments in general, and he makes an excellent point.

[A]s a society, we use arguments the wrong way. We tend to treat arguments like debate competitions — two people argue in front of a crowd, and whoever wins gets the love and adoration of the crowd, and whoever loses goes home defeated and shamed. I guess that’s better than seeing arguments as threats of physical violence, but I still prefer the idea of arguing as a way to learn, to bounce ideas off of other people. Proving you’re smart is a pointless endeavor (unless you’re looking for a job), and is an example of what Stanford University psychologist Carol Dweck calls a “fixed mindset.” As the band Sparks once sang, “Everybody’s stupid — that’s for sure” [even though nobody wants to be called stupid]. What matters is going in the right direction — becoming less stupid, little by little.

But I think Smith’s ideal isn’t all that practical. To begin with, as Megan McArdle emphasizes, by calling one who disagrees with you stupid (even implicitly) “you have guaranteed that no one who disagrees with you will hear a word that you are saying.” Thus “calling people stupid is simply a performance for the fellow travelers in your audience” as well as a means of asserting superiority.

My sense is that the key element to this discussion is that most partisans see “their side” as not just true, but obviously true. It’s a by-product of bias blindness, or selective perception.  We tend to see bias in others but not in ourselves. Therefore, our strongly held positions aren’t really debatable — they’re objectively and obviously true. After all, if we didn’t think our positions were true, we wouldn’t hold them. And (our thinking goes) since they are objectively true, anyone who makes the effort to try should be able to ascertain that truth. Our opponents are thus without excuse.  Continue reading

The Backfire Effect

InvestmentABCs1If you were wrong about something important, how quickly would you want to know and how quickly would you want to do something about it? Unfortunately, the answer isn’t nearly as obvious as we’d like to think.

Mark Twain sagely noted that a lie can travel half way around the world while the truth is putting on its shoes. That’s because the truth is so much messier. Lies are created to be believable. They cater to our prejudices, whims, desires and hopes even when the truth cannot. Lies offer a good story when the truth does not. They are plausible when the truth is not. We often resist and even deny the truth. It is inherently unwieldy. It requires a careful sifting and analysis of facts in order to be discerned — we want deduction but are limited to induction most of the time. The truth is simply very hard to handle.

Of course, if we’re talking about relatively trivial matters (perhaps the distance from the earth to the moon) or about something we’re predisposed to believe anyway, we adjust our beliefs quite readily. But when truth doesn’t fit with what is important to us — when it matters — our perception of it gets caught up in who we perceive ourselves to be and in our vested interests. In those instances, attacking false information with data and related evidence often backfires, having the opposite of the desired effect. We like to think that straightforward education overcomes falsehoods, but things aren’t nearly that simple. This horrifying phenomenon — the backfire effect — was demonstrated once again recently in a study of the responses of parents to various forms of reporting that vaccines are not dangerous. Continue reading