MORE THAN YOU KNOW 1 2 3 4 5 6 7 8 9 0 1 MORE THAN YOU KNOW 2 3 4 5 6 7 Finding Financial Wisdom in Unconventional Places 8 9 20 1 2 3 4 5 Columbia University Press New York 6 7 8 9 30 1 2 3 4 5 6 610-037-cmp2-001-r01.indd 2 3/14/06 11:10:41 AM MORE THAN YOU KNOW Finding Financial Wisdom in Unconventional Places Michael J. Mauboussin 610-037-cmp2-001-r01.indd 3 3/14/06 11:10:46 AM Columbia University Press Publishers Since 1893 New York Chichester, West Sussex Copyright © 2006 Michael J. Mauboussin All rights reserved Library of Congress Cataloging-in-Publication Data Mauboussin, Michael J., 1964– More than you know : fi nding fi nancial wisdom in unconventional places / Michael J. Mauboussin. p. cm. Includes bibliographical references and index. ISBN 0–231–13870–9 (cloth : alk. paper) 1. Investments. 2. Investments—Psychological aspects. 3. Finance, Personal. I. Title. HG4521 .M365 2006 332.6—dc22 2005034238 A Columbia University Press books are printed on permanent and durable acid-free paper. Printed in the United States of America c 10 9 8 7 6 5 4 3 2 1 A balanced perspective cannot be acquired by studying disci- plines in pieces but through pursuit of the consilience among them. Such unifi cation will come hard. But I think it is inevi- table. Intellectually it rings true, and it gratifi es impulses that rise from the admirable side of human nature. To the extent that the gaps between the great branches of learning can be narrowed, diversity and depth of knowledge will increase. —Edward O. Wilson, Consilience To my parents Who always stood behind me but were never too close contents Acknowledgments xvii Introduction 1 PART 1: Investment Philosophy Introduction 7 1 Be the House: Process and Outcome in Investing 9 Hit Me 9 From Treasury to Treasure 11 Prioritizing Process 14 2 Investing—Profession or Business? Thoughts on Beating the Market Index 15 The Scouting Report 15 Evaluating the Winners 17 The Investing Profession Versus the Investment Business 19 3 The Babe Ruth Effect: Frequency Versus Magnitude in Expected Value 23 Batting with the Babe 23 The Downside of Hardwiring 24 Bulls, Bears, and Odds 25 From OTC to OTB 26 A Useful Analogy 27 4 Sound Theory for the Attribute Weary: The Importance of Circumstance-Based Categorization 29 Circumstance Over Attributes 29 The Three Steps of Theory Building 30 When, Not What 33 x CONTENTS 5 Risky Business: Risk, Uncertainty, and Prediction in Investing 35 Rocket Science 35 From Uncertainty to Probability 36 How Predictions Change Future Payoffs 39 6 The Hot Hand in Investing: What Streaks Tell Us About Perception, Probability, and Skill 40 Finding the Hot Shot 40 Streaks and Skill 41 Toss Out the Coin Toss 42 Streaks and Luck 44 7 Time Is on My Side: Myopic Loss Aversion and Portfolio Turnover 46 One or One Hundred 46 Explaining the Equity-Risk Premium 47 The Value of Inactivity 49 Pictures Worth a Thousand Words 53 PART 2: Psychology of Investing Introduction 57 8 Good Morning, Let the Stress Begin: Linking Stress to Suboptimal Portfolio Management 59 Why Zebras Don’t Get Ulcers 59 Why Money Managers Do Get Ulcers 60 Shortening Horizons 61 Imitating Ulysses 64 9 All I Really Need to Know I Learned at a Tupperware Party: What Tupperware Parties Teach You About Investing and Life 65 A Tip from Shining Shoes 65 You Can Fool Mother Nature 66
Description: