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Jason Zweig: Can You Pick The Guys Who Pick The Guys Who Pick The Best Stocks?
A handful of mutual funds and exchange-traded funds seek to emulate such leading investors as hedge-fund manager William Ackman of Pershing Square Capital Management. Most of these funds are down 5% or more for 2015, and some have lost at least 10% over the past three months as the embattled drug company Valeant Pharmaceuticals International . and other holdings of top investors have tumbled Regards, Ted http://blogs.wsj.com/moneybeat/2015/11/20/can-you-pick-the-guys-who-pick-the-guys-who-pick-the-best-stocks/tab/print/
This Jason Zweig article is very reminiscent of a very famous John Maynard Keynes story.
Zweig asked “Can you pick the guys who pick the guys who pick the best stocks”. Zweig concluded that “Picking market-beating stocks is hard. Picking the people who can pick market-beating stocks is at least as hard. And picking funds that can pick people who can pick market-beating stocks may be the hardest of all.”
That’s a variation of Keynes’s beauty contest insight. Richard Thaler defined this as an illustration of “third level” thinking. Here is a Link to Thaler’s recent article:
In the Keynes beauty contest scenario, “each competitor has to pick, not those faces that he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.” The parallelism is evident.
The referenced article offers more. Thaler summarizes a number guessing game that has the same logic as the Zweig and Keynes insights. You might enjoy playing this single question game. Give it a try.
Various players use differing levels of thinking to arrive at their answer. Thaler presents data from a recent survey that included 583 individual participants.
Richard Thaler observes that “Keynes’s beauty-contest analogy remains an apt description of what money managers do.” The mutual fund manager performance data suggests that these managers would not do well at the Keynes beauty contest game. Investing is not as easy at it seems.
@MJG I know it's a stretch, but in a way it resembles the conjunction fallacy, a.k.a. "The Linda Problem". Have you heard of it? I catch myself doing it frequently enough to bother me, and I see it expressed quite often in discussion board comments (including the MFO board).
Thanks very much for your submittal, but especially thank you for reminding me of the Conjunction fallacy. I am familiar with the work of Kahneman and Tversky so I am aware of the Conjunction fallacy, but I failed to recall that its common nickname is The Linda Problem.
I agree with you that we all fall victim to this behavioral fallacy at some time or another; it is a pervasive shortcoming. And yes it does appear on a few MFO posts; it is hard to escape from it if folks don’t think in terms of compound probabilities. Folks seem to resist that discipline.
For example, if you are invited to a financial investment meeting, what is the probability that a casual encounter will be with the money manager presenter if M people are present? The likely answer is 1/M or 2/M. Most folks would know that answer.
Now, what is the likelihood that the person you meet is a successful money manager? Most folks would not know that a high probability correct answer to that question is 0.1/M. Successful money managers are hard to find because they are a rare breed.
The Conjunction fallacy has been captured in many public media. It is often a major part of a movie theme. A terrific example of it is excitingly demonstrated in “The Enemy Below” movie. That film features Robert Mitchum as the destroyer skipper and Curt Jürgens as the submarine commander. It’s the great “he thinks I’ll do this, so I will not, but he knows I will not so…..” 3rd or even 4th level logic chain.
Here is a Link to that 1957 movie trailer:
I agree with the Keynes and the Zweig observation that multidimensional thinking and depth are required when making decisions. However, there is a practical limit and danger in the depth dimension.
Many of us are guilty of over-thinking an investment. Since we never have access to complete information, we often delay and delay a decision until the optimum investment point has passed. We are victim to paralysis caused by too much analyses.
As investors, it is a challenge to decide when enough information is enough to make a reasonable decision. That threshold balance point is hard to define, and likely changes for each decision. Firm rules don’t exist. Investing may seem easy, but is never easy to execute.
I have pontificated far too long. Thanks again for your comments.
@MFO Members: From mutual fund management skills to the The Enemy Below only MJG could tie the two together. That's what makes this board so great. Regards, Ted
@MJG Oh yes, and I can think of another infamous example of a 3rd and 4th (il)logic chain:
I really think the human mind is incapable of escaping this fallacy, it is so hard-wired into our cognitive processes as a species. About all one can do is be on the lookout for it and compensate as needed. And, for crying out loud, be amused by it.
"I am particularly fond of this example [the Linda problem] because I know that the [conjoint] statement is least probable, yet a little homunculus in my head continues to jump up and down, shouting at me—“but she can’t just be a bank teller; read the description.” Stephen J. Gould[1]
(for those familiar with the history of biology, Gould's use of "homunculus" is terribly witty)
When people are asked to compare the probabilities of a conjunction and one of its conjuncts, they sometimes judge that the conjunction is more likely than one of its conjuncts. This seems to happen when the conjunction suggests a scenario that is more easily imagined than the conjunct alone. Psychologists Kahneman and Tversky discovered in their experiments that statistical sophistication made little difference in the rates at which people committed the conjunction fallacy. This suggests that it is not enough to teach probability theory alone, but that people need to learn directly about the conjunction fallacy in order to counteract the strong psychological effect of imaginability.
And for MFOers who don't understand why we'd be prattling on about this, here is a recent mention of this fallacy by Clifford Asness of AQR on his personal blog site; he sounds a bit consternated, no? https://www.aqr.com/cliffs-perspective/do-not-go-for-the-exacta
Comments
This Jason Zweig article is very reminiscent of a very famous John Maynard Keynes story.
Zweig asked “Can you pick the guys who pick the guys who pick the best stocks”. Zweig concluded that “Picking market-beating stocks is hard. Picking the people who can pick market-beating stocks is at least as hard. And picking funds that can pick people who can pick market-beating stocks may be the hardest of all.”
That’s a variation of Keynes’s beauty contest insight. Richard Thaler defined this as an illustration of “third level” thinking. Here is a Link to Thaler’s recent article:
http://www.ft.com/cms/s/0/6149527a-25b8-11e5-bd83-71cb60e8f08c.html
In the Keynes beauty contest scenario, “each competitor has to pick, not those faces that he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.” The parallelism is evident.
The referenced article offers more. Thaler summarizes a number guessing game that has the same logic as the Zweig and Keynes insights. You might enjoy playing this single question game. Give it a try.
Various players use differing levels of thinking to arrive at their answer. Thaler presents data from a recent survey that included 583 individual participants.
Richard Thaler observes that “Keynes’s beauty-contest analogy remains an apt description of what money managers do.” The mutual fund manager performance data suggests that these managers would not do well at the Keynes beauty contest game. Investing is not as easy at it seems.
Best Wishes.
I know it's a stretch, but in a way it resembles the conjunction fallacy, a.k.a. "The Linda Problem". Have you heard of it? I catch myself doing it frequently enough to bother me, and I see it expressed quite often in discussion board comments (including the MFO board).
Thanks very much for your submittal, but especially thank you for reminding me of the Conjunction fallacy. I am familiar with the work of Kahneman and Tversky so I am aware of the Conjunction fallacy, but I failed to recall that its common nickname is The Linda Problem.
I agree with you that we all fall victim to this behavioral fallacy at some time or another; it is a pervasive shortcoming. And yes it does appear on a few MFO posts; it is hard to escape from it if folks don’t think in terms of compound probabilities. Folks seem to resist that discipline.
For example, if you are invited to a financial investment meeting, what is the probability that a casual encounter will be with the money manager presenter if M people are present? The likely answer is 1/M or 2/M. Most folks would know that answer.
Now, what is the likelihood that the person you meet is a successful money manager? Most folks would not know that a high probability correct answer to that question is 0.1/M. Successful money managers are hard to find because they are a rare breed.
The Conjunction fallacy has been captured in many public media. It is often a major part of a movie theme. A terrific example of it is excitingly demonstrated in “The Enemy Below” movie. That film features Robert Mitchum as the destroyer skipper and Curt Jürgens as the submarine commander. It’s the great “he thinks I’ll do this, so I will not, but he knows I will not so…..” 3rd or even 4th level logic chain.
Here is a Link to that 1957 movie trailer:
I agree with the Keynes and the Zweig observation that multidimensional thinking and depth are required when making decisions. However, there is a practical limit and danger in the depth dimension.
Many of us are guilty of over-thinking an investment. Since we never have access to complete information, we often delay and delay a decision until the optimum investment point has passed. We are victim to paralysis caused by too much analyses.
As investors, it is a challenge to decide when enough information is enough to make a reasonable decision. That threshold balance point is hard to define, and likely changes for each decision. Firm rules don’t exist. Investing may seem easy, but is never easy to execute.
I have pontificated far too long. Thanks again for your comments.
Best Wishes.
Regards,
Ted
I really think the human mind is incapable of escaping this fallacy, it is so hard-wired into our cognitive processes as a species. About all one can do is be on the lookout for it and compensate as needed. And, for crying out loud, be amused by it.
https://en.wikipedia.org/wiki/Conjunction_fallacy (for those familiar with the history of biology, Gould's use of "homunculus" is terribly witty)
Also http://www.fallacyfiles.org/conjunct.html#Answer And for MFOers who don't understand why we'd be prattling on about this, here is a recent mention of this fallacy by Clifford Asness of AQR on his personal blog site; he sounds a bit consternated, no?
https://www.aqr.com/cliffs-perspective/do-not-go-for-the-exacta