Unlike the believers in the efficient market hypothesis and advocates of index-linked investments, Mauboussin emphasises the need for a focus on process over short-term results in order to distinguish between luck and skill of investors.
He does believe that you can outperform arguing that 'super performers have more in common with one another that they do with the average participant in their own field.'
His paper approaches investor decision making from three angles:
- Inputs from successful people in various domains.
- Expected Value.
- Heuristics and Biases and why we fail to calibrate probabilities and outcomes properly.
He highlights a further 3 strategies to avoid the problems:
- Focus on process rather than the outcome.
- A constant search for favourable odds.
- An understanding of the role of time.
'Focus on establishing a superior process with the understanding that outcomes take care of themselves' - MJM
Any individual decision can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because of the recognised possibility of failure in fact occurs. But over time, more thoughtful decision-making can be encouraged by evaluating decisions on how well they were made rather than on outcome.
Much of the real world is controlled as much by the "tails" of the distribution as by the averages: by the exceptional, not the mean; by the catastrophe, not the steady drip; by the very rich, not by the "middle class". We need to free ourselves from "average" thinking.
- Try not to overestimate your abilities.
- Actively challenge your own assumptions.
- Ask disconfirming questions.
- Realise that past events or prices are sign posts, not answers.
- View decisions from various perspectives.
- Seek information from a variety of sources.
- Reframe questions.
- Consider only future costs and benefits.
Any other suggestions of other papers/books/articles to read would be appreciated.
You might want to add this book to your list:
ReplyDeleteBehavioral Finance and Wealth Management: How to Build Optimal Portfolios That Account for Investor Biases
Michael M. Pompian
ISBN: 0471745170
From the Inside Flap:
Although fear and greed have always driven the markets—— as well as good and bad investment decision-making—— behavioral finance as a discipline has only recently attracted serious attention from both financial professionals and investors. Given the run up in stock prices during the late 1990s, and the subsequent popping of the technology bubble, understanding investor behavior is now more important than ever.
As a wealth manager and practitioner at the forefront of the practical application of behavioral finance, Michael Pompian understands the behavioral biases that investors have. Through his experiences, he has discovered specific ways to adjust investment programs for these biases, and now he shares these findings in Behavioral Finance and Wealth Management.
Comprising four distinct parts, Behavioral Finance and Wealth Management is a comprehensive guide to both understanding irrational investor behavior and creating portfolios for individual investors that account for these behaviors.
Part One provides a straightforward introduction to the practical application of behavioral finance. These chapters include an overview of what behavioral finance is on an individual level, a history of behavioral finance, and an introduction to incorporating investor behavior into the asset allocation process.
Part Two contains a detailed review of some of the most commonly found biases, complete with general and technical descriptions, practical applications, research reviews, implications for investors, diagnostic tests, and advice on managing the effects of each bias.
Part Three takes the concepts presented in the first two parts and pulls them together in the form of case studies, which clearly demonstrate how practitioners and investors can use behavioral finance in real-world settings.
Part Four explores some special topics in the practical application of behavioral finance, with an eye toward the future of what might lie ahead for the next phase of this discipline.
Thanks, will definitely get to that.
ReplyDeleteHere is the link to it on Amazon. Remarkable that the digital, Kindle version costs only $3 less.
Meanwhile I'm reading Buffett (Snowball) to review the Buffett approach again!
ReplyDelete