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Article Check - Process and Outcome in Investing
Are you thinking about starting your own cleaning business? Running your own business offers many rewards and gives you the freedom of being your own boss. You can also achieve great personal satisfaction from starting with a just few cleaning clients and building a successful and thriving business. Starting a new business is demanding on your time, family and finances. So before getting too far into the process of setting up your new cleaning business, it's important to take an objective look at yourself and see if you have what it takes to become a successful entrepreneur.Answering the following questions will help you discover your entrepreneurial strengths and weaknesses:1. Do you have a positive attitude about yourself and your abilities? You're going to run up against competition, tough to sell clients and many other obstacles. A business owner needs to be able to have a strong positive attitude and a thick skin to make it through rough times.2. Are you a leader? Your employees, customers and even suppliers will be relying on your strong leadership abilities.3. Do you like to make your own decisions? Decisions can be tough to make and at times they'll have to be made quickly.4. Are you a self-starter? Remember, as a small business owner everything is up to yo
4. Judge decisions not only on results, but also on how they were made. A good process is one that carefully considers price against expected value. Investors can improve their process through quality feedback and ongoing learning.
One of my former students, a very successful hedge fund manager, called to tell me that he is abolishing the use of target prices in his firm for two reasons. First, he wants all of the analysts to express their opinions in expected value terms, an exercise that compels discussion about payoffs and probabilities. Entertaining various outcomes also mitigates the risk of excessive focus on a particular scenario -- a behavioral pitfall called “anchoring.”
Second, expected-value thinking provides the analysts with psychological cover when they are wrong. Say you’re an analyst who recommends purchase of a stock with a target price above today’s price. You’re likely to succumb to the confirmation trap, where you will seek confirming evidence and dismiss or discount disconfirming evidence.
If, in contrast, your recommendation is based on an expected-value analysis, it will include a downside scenario with an associated probability. You will go into the investment knowing that the outcome will be unfavorable some percentage of the time. This prior acknowledgement, if shared by the organization, allows analysts to be wrong periodically without the stigma of failure.
Prioritizing Process
The investment community, because of incentives and measurement systems, is too focused on outcome and not enough on process. In Rubin’s words:
It’s not that results don’t matter. They do. But judging solely on results is a serious deterrent to taking risks that may be necessary to making the right decision. Simply put, the way decisions are evaluated affects the way decisions are made.<
For small business owners, the process of selling their business can become more complicated than the process that bigger companies go through when they sell their business. This is because in contrast to big business owners, small business owners do not have ready access to Wall Street investment bankers, merger and acquisition firms, and high priced brokers who can make the process a lot easier. However, this does not mean that small business owners cannot have access to the guidance that they need to help them get the best possible deal for their business. This is because there are some sources from which business owners can get very helpful information, which can help provide them some direction on the steps they need to take when they sell their business. One of these sources is the Internet, which hosts a number of websites that provide financial advice to people.The Internet is host to a number of websites that provide helpful financial advice to people, which include people who want to sell their business. Among these websites, there are some pieces of advice or tips that are quite common, the following sections discuss some of the most common tip that these websites give. One of these is that most websites say that business owners need to conduct a preliminary assessment of the val
Be the House
Individual decisions can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possibility of failure in fact occurs. But over time, more thoughtful decision-making will lead to better overall results, and more thoughtful decision-making can be encouraged by evaluating decisions on how well they were made rather than on outcome.
--Robert Rubin, Harvard Commencement Address, 2001
Any time you make a bet with the best of it, where the odds are in your favor, you have earned something on that bet, whether you actually win or lose the bet. By the same token, when you make a bet with the worst of it, where the odds are not in your favor, you have lost something, whether you actually win or lose the bet.
--David Sklansky, The Theory of Poker
Hit Me
Paul DePodesta, a former baseball executive and one of the protagonists in Michael Lewis’s Moneyball, tells about playing blackjack in Las Vegas when a guy to his right, sitting on a seventeen, asks for a hit. Everyone at the table stops, and even the dealer asks if he is sure. The player nods yes, and the dealer, of course, produces a four. What did the dealer say? “Nice hit.” Yeah, great hit. That’s just the way you want people to bet -- if you work for a casino.
This anecdote draws attention to one of the most fundamental concepts in investing: process versus outcome. In too many cases, investors dwell solely on outcomes without appropriate consideration of process. The focus on results is to some degree understandable. Results -- the bottom line -- are what ultimately matter. And results are typically easier to assess and more objective than evaluating processes.
But investors often make the critical mistake of assuming that good outcomes are the result of a good process and that bad outcomes imply a bad process. In contrast, the best long-term performers in any probabilistic field -- such as investing, sports-team management, and pari-mutuel betting -- all emphasize process over outcome.
Jay Russo and Paul Schoemaker illustrate the process-versus-outcome message with a simple two-by-two matrix. Their point is that because of probabilities, good decisions will sometimes lead to bad outcomes, and bad decisions will sometimes lead to good outcomes -- as the hit-on-seventeen story illustrates. Over the long haul, however, process dominates outcome. That’s why a casino -- “the house” -- makes money over time.
The goal of an investment process is unambiguous: to identify gaps between a company’s stock price and its expected value. Expected value, in turn, is the weighted-average value for a distribution of possible outcomes. You calculate it by multiplying the payoff (i.e., stock price ) for a given outcome by the probability that the outcome materializes.
Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price. Note the consistency between Michael Steinhardt and Steven Crist, two very successful individuals in two very different fields:
I defined variant perception as holding a well-founded view that was meaningfully different from market consensus . . . Understanding market expectation was at least as important as, and often different from, the fundamental knowledge.
The issue is not which horse in the race is the most likely winner, but which horse or horses are offering odds that exceed their actual chances of victory . . . This may sound elementary, and many players may think that they are following this principle, but few actually do. Under this mindset, everything but the odds fades from view. There is no such thing as “liking” a horse to win a race, only an attractive discrepancy between his chances and his price.
A thoughtful investment process contemplates both probability and payoffs and carefully considers where the consensus -- as revealed by a price -- may be wrong. Even though there are also some important features that make investing different than, say, a casino or the track, the basic idea is the same: you want the positive expected value on your side.
From Treasury to Treasure
In a series of recent commencement addresses, former Treasury Secretary Robert Rubin offered the graduates four principles for decision making. These principles are especially valuable for the financial community:
1. The only certainty is that there is no certainty. This principle is especially true for the investment industry, which deals largely with uncertainty. In contrast, the casino business deals largely with risk. With both uncertainty and risk, outcomes are unknown. But with uncertainty, the underlying distribution of outcomes is undefined, while with risk we know what that distribution looks like. Corporate undulation is uncertain; roulette is risky.
The behavioral issue of overconfidence comes into play here. Research suggests that people are too confident in their own abilities and predictions. As a result, they tend to project outcome ranges that are too narrow. Over the past seventy-five years alone, the United States has seen a depression, multiple wars, an energy crisis, and a major terrorist attack. None of these outcomes were widely anticipated. Investors need to train themselves to consider a sufficiently wide range of outcomes. One way to do this is to pay attention to the leading indicators of “inevitable surprises.”
An appreciation of uncertainty is also very important for money management. Numerous crash-and-burn hedge fund stories boil down to committing too much capital to an investment that the manager overconfidently assessed. When allocating capital, portfolio managers need to consider that unexpected events do occur.
2. Decisions are a matter of weighing probabilities. We’ll take the liberty of extending Rubin’s point to balancing the probability of an outcome (frequency) with the outcome’s payoff (magnitude). Probabilities alone are insufficient when payoffs are skewed.
Let’s start with another concept from behavioral finance: loss aversion. For good evolutionary reasons, humans are averse to loss when they make choices between risky outcomes. More specifically, a loss has about two and a half times the impact of a gain of the same size. So we like to be right and hence often seek high-probability events.
A focus on probability is sound when outcomes are symmetrical, but completely inappropriate when payoffs are skewed. Consider that roughly 90 percent of option positions lose money. Does that mean that owning options is a bad idea? The answer lies in how much money you make on the 10 percent of options positions that are profitable. If you buy ten options each for $1, and 9 of them expire worthless but the tenth rises to $25, you’d have an awful frequency of success but a tidy profit.
So some high-probability propositions are unattractive, and some low-probability propositions are very attractive on an expected-value basis. Say there’s a 75 percent probability that a stock priced for perfection makes its earnings number and, hence, rises 1 percent, but there’s a 25 percent likelihood that the company misses its forecast and plummets 10 percent. That stock offers a great probability but a negative expected value.
3. Despite uncertainty, we must act. Rubin’s point is that we must base the vast majority of our decisions on imperfect or incomplete information. But we must still make decisions based on an intelligent appraisal of available information.
Russo and Schoemaker note that we often believe more information provides a clearer picture of the future and improves our decision making. But in reality, additional information often only confuses the decision-making process.
Researchers illustrated this point with a study of horse-race handicappers. They first asked the handicappers to make race predictions with five pieces of information. The researchers then asked the handicappers to make the same predictions with ten, twenty, and forty pieces of information for each horse in the race. Even though the handicappers gained little accuracy by using the additional information, their confidence in their predictive ability rose with the supplementary data.
4. Judge decisions not only on results, but also on how they were made. A good process is one that carefully considers price against expected value. Investors can improve their process through quality feedback and ongoing learning.
One of my former students, a very successful hedge fund manager, called to tell me that he is abolishing the use of target prices in his firm for two reasons. First, he wants all of the analysts to express their opinions in expected value terms, an exercise that compels discussion about payoffs and probabilities. Entertaining various outcomes also mitigates the risk of excessive focus on a particular scenario -- a behavioral pitfall called “anchoring.”
Second, expected-value thinking provides the analysts with psychological cover when they are wrong. Say you’re an analyst who recommends purchase of a stock with a target price above today’s price. You’re likely to succumb to the confirmation trap, where you will seek confirming evidence and dismiss or discount disconfirming evidence.
If, in contrast, your recommendation is based on an expected-value analysis, it will include a downside scenario with an associated probability. You will go into the investment knowing that the outcome will be unfavorable some percentage of the time. This prior acknowledgement, if shared by the organization, allows analysts to be wrong periodically without the stigma of failure.
Prioritizing Process
The investment community, because of incentives and measurement systems, is too focused on outcome and not enough on process. In Rubin’s words:
It’s not that results don’t matter. They do. But judging solely on results is a serious deterrent to taking risks that may be necessary to making the right decision. Simply put, the way decisions are evaluated affects the way decisions are made. Is Your Key Control a Cornerstone or Liability
Have you ever thought about how your retail organization handles the distribution and record keeping for its mechanical keys? If you have, what did you conclude? That the current system is a cornerstone of your security program or a liability? If you’re like most, you might have reached the decision that it was just too stressful to think about and simply stopped thinking about it.Whether you have hundreds or thousands of stores – the issue of key control MUST be addressed or it will likely impair the effectiveness of all your other security operations.Where do you start?By reading this far you already have started. Now let’s take it to the next level by breaking the problem down into its simplest components.A good example of a company that does it right is G & S Oil, a retail marketer of Conoco and Texaco petroleum products throughout Colorado. G & S follows each of these four steps in managing key control at its seven service stations and 6 convenience stores.G & S recognizes that there are four critical pieces you must address when looking at key control.1. The quantity of existing keys has to be controllable. Management must know the number of keys being used at each location. Five cannot turn into six without your knowledge. It’s that sixth key
Jay Russo and Paul Schoemaker illustrate the process-versus-outcome message with a simple two-by-two matrix. Their point is that because of probabilities, good decisions will sometimes lead to bad outcomes, and bad decisions will sometimes lead to good outcomes -- as the hit-on-seventeen story illustrates. Over the long haul, however, process dominates outcome. That’s why a casino -- “the house” -- makes money over time.
The goal of an investment process is unambiguous: to identify gaps between a company’s stock price and its expected value. Expected value, in turn, is the weighted-average value for a distribution of possible outcomes. You calculate it by multiplying the payoff (i.e., stock price ) for a given outcome by the probability that the outcome materializes.
Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price. Note the consistency between Michael Steinhardt and Steven Crist, two very successful individuals in two very different fields:
I defined variant perception as holding a well-founded view that was meaningfully different from market consensus . . . Understanding market expectation was at least as important as, and often different from, the fundamental knowledge.
The issue is not which horse in the race is the most likely winner, but which horse or horses are offering odds that exceed their actual chances of victory . . . This may sound elementary, and many players may think that they are following this principle, but few actually do. Under this mindset, everything but the odds fades from view. There is no such thing as “liking” a horse to win a race, only an attractive discrepancy between his chances and his price.
A thoughtful investment process contemplates both probability and payoffs and carefully considers where the consensus -- as revealed by a price -- may be wrong. Even though there are also some important features that make investing different than, say, a casino or the track, the basic idea is the same: you want the positive expected value on your side.
From Treasury to Treasure
In a series of recent commencement addresses, former Treasury Secretary Robert Rubin offered the graduates four principles for decision making. These principles are especially valuable for the financial community:
1. The only certainty is that there is no certainty. This principle is especially true for the investment industry, which deals largely with uncertainty. In contrast, the casino business deals largely with risk. With both uncertainty and risk, outcomes are unknown. But with uncertainty, the underlying distribution of outcomes is undefined, while with risk we know what that distribution looks like. Corporate undulation is uncertain; roulette is risky.
The behavioral issue of overconfidence comes into play here. Research suggests that people are too confident in their own abilities and predictions. As a result, they tend to project outcome ranges that are too narrow. Over the past seventy-five years alone, the United States has seen a depression, multiple wars, an energy crisis, and a major terrorist attack. None of these outcomes were widely anticipated. Investors need to train themselves to consider a sufficiently wide range of outcomes. One way to do this is to pay attention to the leading indicators of “inevitable surprises.”
An appreciation of uncertainty is also very important for money management. Numerous crash-and-burn hedge fund stories boil down to committing too much capital to an investment that the manager overconfidently assessed. When allocating capital, portfolio managers need to consider that unexpected events do occur.
2. Decisions are a matter of weighing probabilities. We’ll take the liberty of extending Rubin’s point to balancing the probability of an outcome (frequency) with the outcome’s payoff (magnitude). Probabilities alone are insufficient when payoffs are skewed.
Let’s start with another concept from behavioral finance: loss aversion. For good evolutionary reasons, humans are averse to loss when they make choices between risky outcomes. More specifically, a loss has about two and a half times the impact of a gain of the same size. So we like to be right and hence often seek high-probability events.
A focus on probability is sound when outcomes are symmetrical, but completely inappropriate when payoffs are skewed. Consider that roughly 90 percent of option positions lose money. Does that mean that owning options is a bad idea? The answer lies in how much money you make on the 10 percent of options positions that are profitable. If you buy ten options each for $1, and 9 of them expire worthless but the tenth rises to $25, you’d have an awful frequency of success but a tidy profit.
So some high-probability propositions are unattractive, and some low-probability propositions are very attractive on an expected-value basis. Say there’s a 75 percent probability that a stock priced for perfection makes its earnings number and, hence, rises 1 percent, but there’s a 25 percent likelihood that the company misses its forecast and plummets 10 percent. That stock offers a great probability but a negative expected value.
3. Despite uncertainty, we must act. Rubin’s point is that we must base the vast majority of our decisions on imperfect or incomplete information. But we must still make decisions based on an intelligent appraisal of available information.
Russo and Schoemaker note that we often believe more information provides a clearer picture of the future and improves our decision making. But in reality, additional information often only confuses the decision-making process.
Researchers illustrated this point with a study of horse-race handicappers. They first asked the handicappers to make race predictions with five pieces of information. The researchers then asked the handicappers to make the same predictions with ten, twenty, and forty pieces of information for each horse in the race. Even though the handicappers gained little accuracy by using the additional information, their confidence in their predictive ability rose with the supplementary data.
4. Judge decisions not only on results, but also on how they were made. A good process is one that carefully considers price against expected value. Investors can improve their process through quality feedback and ongoing learning.
One of my former students, a very successful hedge fund manager, called to tell me that he is abolishing the use of target prices in his firm for two reasons. First, he wants all of the analysts to express their opinions in expected value terms, an exercise that compels discussion about payoffs and probabilities. Entertaining various outcomes also mitigates the risk of excessive focus on a particular scenario -- a behavioral pitfall called “anchoring.”
Second, expected-value thinking provides the analysts with psychological cover when they are wrong. Say you’re an analyst who recommends purchase of a stock with a target price above today’s price. You’re likely to succumb to the confirmation trap, where you will seek confirming evidence and dismiss or discount disconfirming evidence.
If, in contrast, your recommendation is based on an expected-value analysis, it will include a downside scenario with an associated probability. You will go into the investment knowing that the outcome will be unfavorable some percentage of the time. This prior acknowledgement, if shared by the organization, allows analysts to be wrong periodically without the stigma of failure.
Prioritizing Process
The investment community, because of incentives and measurement systems, is too focused on outcome and not enough on process. In Rubin’s words:
It’s not that results don’t matter. They do. But judging solely on results is a serious deterrent to taking risks that may be necessary to making the right decision. Simply put, the way decisions are evaluated affects the way decisions are made.<
ISO 9000 grew out of BS 5750, a standard published by the British Standards Institution (BSI) in 1979. Initially, it was used only in manufacturing industries. ISO 9000 is now employed across a variety of other types of businesses. It is a set of international standards of quality management systems. ISO 9000 has been accepted by more than 100 countries as their national quality assurance standard by the end of 1997.The history of ISO 9000 dates back to Mil-Q-9858a, the first quality standard for military procurement established in 1959 by the US. By 1962, NASA (National Aeronautics and Space Administration) developed its quality system requirements for suppliers. In 1965, NATO (North Atlantic Treaty Organization) accepted the AQAP (allied quality assurance procedures) specifications for the procurement of equipments.During the 1970s, BSI published BS 9000 (the first UK standard for quality assurance) and BS 5179 (guidelines for quality assurance) norms. In 1979, it created BS 5750, a series of standards for use by manufacturing companies. They were enforced through assessments and audits. In 1988, ISO (International Standards Organization) adopted the BS 5750 standard without changes and published it globally under the name ISO 9000. The ISO adopted this standard with a view to create
From Treasury to Treasure
In a series of recent commencement addresses, former Treasury Secretary Robert Rubin offered the graduates four principles for decision making. These principles are especially valuable for the financial community:
1. The only certainty is that there is no certainty. This principle is especially true for the investment industry, which deals largely with uncertainty. In contrast, the casino business deals largely with risk. With both uncertainty and risk, outcomes are unknown. But with uncertainty, the underlying distribution of outcomes is undefined, while with risk we know what that distribution looks like. Corporate undulation is uncertain; roulette is risky.
The behavioral issue of overconfidence comes into play here. Research suggests that people are too confident in their own abilities and predictions. As a result, they tend to project outcome ranges that are too narrow. Over the past seventy-five years alone, the United States has seen a depression, multiple wars, an energy crisis, and a major terrorist attack. None of these outcomes were widely anticipated. Investors need to train themselves to consider a sufficiently wide range of outcomes. One way to do this is to pay attention to the leading indicators of “inevitable surprises.”
An appreciation of uncertainty is also very important for money management. Numerous crash-and-burn hedge fund stories boil down to committing too much capital to an investment that the manager overconfidently assessed. When allocating capital, portfolio managers need to consider that unexpected events do occur.
2. Decisions are a matter of weighing probabilities. We’ll take the liberty of extending Rubin’s point to balancing the probability of an outcome (frequency) with the outcome’s payoff (magnitude). Probabilities alone are insufficient when payoffs are skewed.
Let’s start with another concept from behavioral finance: loss aversion. For good evolutionary reasons, humans are averse to loss when they make choices between risky outcomes. More specifically, a loss has about two and a half times the impact of a gain of the same size. So we like to be right and hence often seek high-probability events.
A focus on probability is sound when outcomes are symmetrical, but completely inappropriate when payoffs are skewed. Consider that roughly 90 percent of option positions lose money. Does that mean that owning options is a bad idea? The answer lies in how much money you make on the 10 percent of options positions that are profitable. If you buy ten options each for $1, and 9 of them expire worthless but the tenth rises to $25, you’d have an awful frequency of success but a tidy profit.
So some high-probability propositions are unattractive, and some low-probability propositions are very attractive on an expected-value basis. Say there’s a 75 percent probability that a stock priced for perfection makes its earnings number and, hence, rises 1 percent, but there’s a 25 percent likelihood that the company misses its forecast and plummets 10 percent. That stock offers a great probability but a negative expected value.
3. Despite uncertainty, we must act. Rubin’s point is that we must base the vast majority of our decisions on imperfect or incomplete information. But we must still make decisions based on an intelligent appraisal of available information.
Russo and Schoemaker note that we often believe more information provides a clearer picture of the future and improves our decision making. But in reality, additional information often only confuses the decision-making process.
Researchers illustrated this point with a study of horse-race handicappers. They first asked the handicappers to make race predictions with five pieces of information. The researchers then asked the handicappers to make the same predictions with ten, twenty, and forty pieces of information for each horse in the race. Even though the handicappers gained little accuracy by using the additional information, their confidence in their predictive ability rose with the supplementary data.
4. Judge decisions not only on results, but also on how they were made. A good process is one that carefully considers price against expected value. Investors can improve their process through quality feedback and ongoing learning.
One of my former students, a very successful hedge fund manager, called to tell me that he is abolishing the use of target prices in his firm for two reasons. First, he wants all of the analysts to express their opinions in expected value terms, an exercise that compels discussion about payoffs and probabilities. Entertaining various outcomes also mitigates the risk of excessive focus on a particular scenario -- a behavioral pitfall called “anchoring.”
Second, expected-value thinking provides the analysts with psychological cover when they are wrong. Say you’re an analyst who recommends purchase of a stock with a target price above today’s price. You’re likely to succumb to the confirmation trap, where you will seek confirming evidence and dismiss or discount disconfirming evidence.
If, in contrast, your recommendation is based on an expected-value analysis, it will include a downside scenario with an associated probability. You will go into the investment knowing that the outcome will be unfavorable some percentage of the time. This prior acknowledgement, if shared by the organization, allows analysts to be wrong periodically without the stigma of failure.
Prioritizing Process
The investment community, because of incentives and measurement systems, is too focused on outcome and not enough on process. In Rubin’s words:
It’s not that results don’t matter. They do. But judging solely on results is a serious deterrent to taking risks that may be necessary to making the right decision. Simply put, the way decisions are evaluated affects the way decisions are made.<
Frankly, most professionals don't give a damn about how to network, because they try and sell who they are and what they do based on past success - assuming this will open doors and business. However by selling rather than marketing, many people just simply walk away with no benefit or potential outcome. Consequently events become nothing short of boring and a general waste of time. I can see you nodding.On the other hand, some professionals enjoy networking, are good conversationalists, and like finding out different people and their industries rather than telling people about them.And they may even bother to remember a few names, and ask questions with genuine curiosity...but sadly believe that a few new business cards in their top pocket and the promise "lunch" they are a) competent networkers and b) business is in the bag.But with no strategy, preparation, and plan in mind before they walk in, they too walk out no better off than before they came - other than having enjoyed a few drinks and the chance to eat highly loaded cholesterol pizzas they wouldn't get at home. Agree?It's never been more important for CEO's, Executives and Directors to master the art of networking to keep abreast of changes, people, situations and expectations of both customer and staff. Fa
Let’s start with another concept from behavioral finance: loss aversion. For good evolutionary reasons, humans are averse to loss when they make choices between risky outcomes. More specifically, a loss has about two and a half times the impact of a gain of the same size. So we like to be right and hence often seek high-probability events.
A focus on probability is sound when outcomes are symmetrical, but completely inappropriate when payoffs are skewed. Consider that roughly 90 percent of option positions lose money. Does that mean that owning options is a bad idea? The answer lies in how much money you make on the 10 percent of options positions that are profitable. If you buy ten options each for $1, and 9 of them expire worthless but the tenth rises to $25, you’d have an awful frequency of success but a tidy profit.
So some high-probability propositions are unattractive, and some low-probability propositions are very attractive on an expected-value basis. Say there’s a 75 percent probability that a stock priced for perfection makes its earnings number and, hence, rises 1 percent, but there’s a 25 percent likelihood that the company misses its forecast and plummets 10 percent. That stock offers a great probability but a negative expected value.
3. Despite uncertainty, we must act. Rubin’s point is that we must base the vast majority of our decisions on imperfect or incomplete information. But we must still make decisions based on an intelligent appraisal of available information.
Russo and Schoemaker note that we often believe more information provides a clearer picture of the future and improves our decision making. But in reality, additional information often only confuses the decision-making process.
Researchers illustrated this point with a study of horse-race handicappers. They first asked the handicappers to make race predictions with five pieces of information. The researchers then asked the handicappers to make the same predictions with ten, twenty, and forty pieces of information for each horse in the race. Even though the handicappers gained little accuracy by using the additional information, their confidence in their predictive ability rose with the supplementary data.
4. Judge decisions not only on results, but also on how they were made. A good process is one that carefully considers price against expected value. Investors can improve their process through quality feedback and ongoing learning.
One of my former students, a very successful hedge fund manager, called to tell me that he is abolishing the use of target prices in his firm for two reasons. First, he wants all of the analysts to express their opinions in expected value terms, an exercise that compels discussion about payoffs and probabilities. Entertaining various outcomes also mitigates the risk of excessive focus on a particular scenario -- a behavioral pitfall called “anchoring.”
Second, expected-value thinking provides the analysts with psychological cover when they are wrong. Say you’re an analyst who recommends purchase of a stock with a target price above today’s price. You’re likely to succumb to the confirmation trap, where you will seek confirming evidence and dismiss or discount disconfirming evidence.
If, in contrast, your recommendation is based on an expected-value analysis, it will include a downside scenario with an associated probability. You will go into the investment knowing that the outcome will be unfavorable some percentage of the time. This prior acknowledgement, if shared by the organization, allows analysts to be wrong periodically without the stigma of failure.
Prioritizing Process
The investment community, because of incentives and measurement systems, is too focused on outcome and not enough on process. In Rubin’s words:
It’s not that results don’t matter. They do. But judging solely on results is a serious deterrent to taking risks that may be necessary to making the right decision. Simply put, the way decisions are evaluated affects the way decisions are made.<
A limited liability corporation can be defined as a unique legal business unit generated from an amalgamation of the various characteristics of partnership and corporation. It has a separate existence distinct from other business models like sole proprietorship, partnership and corporation. Although this concept is novel for United States, it has long been adopted in various other countries. This distinctive business model has been adopted from the German GmBH model.All the 50 states in the United States allow the formation of limited liability corporations, although the laws governing them in each state may be distinct. Certain jurisdictions, for example, allow only legal practitioners and lawyers to form such corporations. In some states, banks or farms are not allowed to form limited liability corporations.A limited liability corporation is an exclusive business structure which provides the personal liability shield or limited liability protection found in a corporation. It provides taxation advantages (no double taxation) as well as the flexible ownership, investment, control, management and free flow of profit and loss characterizing partnerships.Limited liability entails the observation of less formality than that observed in a corporation, and relatively more formalities
4. Judge decisions not only on results, but also on how they were made. A good process is one that carefully considers price against expected value. Investors can improve their process through quality feedback and ongoing learning.
One of my former students, a very successful hedge fund manager, called to tell me that he is abolishing the use of target prices in his firm for two reasons. First, he wants all of the analysts to express their opinions in expected value terms, an exercise that compels discussion about payoffs and probabilities. Entertaining various outcomes also mitigates the risk of excessive focus on a particular scenario -- a behavioral pitfall called “anchoring.”
Second, expected-value thinking provides the analysts with psychological cover when they are wrong. Say you’re an analyst who recommends purchase of a stock with a target price above today’s price. You’re likely to succumb to the confirmation trap, where you will seek confirming evidence and dismiss or discount disconfirming evidence.
If, in contrast, your recommendation is based on an expected-value analysis, it will include a downside scenario with an associated probability. You will go into the investment knowing that the outcome will be unfavorable some percentage of the time. This prior acknowledgement, if shared by the organization, allows analysts to be wrong periodically without the stigma of failure.
Prioritizing Process
The investment community, because of incentives and measurement systems, is too focused on outcome and not enough on process. In Rubin’s words:
It’s not that results don’t matter. They do. But judging solely on results is a serious deterrent to taking risks that may be necessary to making the right decision. Simply put, the way decisions are evaluated affects the way decisions are made.
Copyright © 2006 Michael J. Mauboussin
an excerpt from the book More Than You Know
by Michael J. Mauboussin
Published by Columbia University Press; June 2006;$27.95US; 0-231-13870-9
Copyright © 2006 Michael J. Mauboussin
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