On More Than You Know

I recently finished reading the book More Than You Know – Finding Financial Wisdom in Unconventional Places – by Michael J. Mauboussin.

The core premise of this book is best summarized by the author: “More Than You Know’s core premise is simple to explain but devilishly difficult to live: you will be better investor, executive, parent, friend – person – if you approach problems from a multidisciplinary perspectives”. He then details his approach: “While the essays cover a range of topics, I categorize them into four parts – investment philosophy, psychology of investing, innovation and competitive strategy, and science and complexity theory. Consider these compartments in a toolbox, each addressing a distinct facet of investing.”

Michael does an excellent job of explaining his multidisciplinary perspectives for investing in a very accessible and practical way – assuming very little prior knowledge. The separate essays are very focused and direct to the point, making this book very easy and relatively quick to ready. A refreshing and very interesting take on investing that can be extended to numerous other fields. A must read!

Below are key excerpts from the book that I found particularly insightful:

1- “Rubin – “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.”

2- “I would argue that many of the performance challenges in the business stem from an unhealthy balance between the profession and the business. Many of the investment managers that do beat the market seem to have the profession at the core.”

3- “…The leading thinkers and practitioners from somewhat varied fields have converged on the same formula: focus not on the frequency of correctness but on the magnitude of correctness.”

4- “The lesson from the process of theory building is that sound theories reflect context. Too many investors cling to attribute-based approaches and wring their hands when the market doesn’t conform to what they think it should do.”

5- “Investors need to pay a great deal of attention to what influences their behavior. Three of Cialdini’s six tendencies are particularly relevant for investors: consistency and commitment, social validation, and scarcity.”

6- “A dominant idea in Western society is that we should separate emotion and rationality. Advances in science show that such a separation is not only impossible but also undesirable. Yet successful investing requires a clear sense of probabilities and payoffs. Investors who are aware of affect are likely to make better decisions over time.”

7- “In markets, a symbiotic relationship between positive and negative feedback generally prevails…But the evidence shows that positive feedback can dominate prices, if only for a short time.”

8- “So The issue is not whether individuals are irrational (they are) but whether they are irrational in the same way at the same time.”

9- “In effect, when the environment is uncertain, it helps to start with lots of alternatives (e.g., synaptic connections) and then select (via pruning) the ones that are best given the environment. The process is undoubtedly costly because lots of energy and resources necessarily go to waste, but it’s the best one going.”

10- “Chess master Bruce Pandolfini observes four behaviors that are consistent among chess champions and useful in thinking through the short-term/long-term debate. 1) Don’t look too far ahead…2) Develop options and continuously revise them based on the changing conditions…3) Know your competition…4) Seek small advantages.”

11- “Idea diversity allows you to find what Johnson calls “weak signals.” A weak signal may be the start of a trend away from the dominant path (such as new technology or development) or the right piece of information at the right time from an unexpected source.”

12- “In his 2001 letter to shareholders, Warren Buffett distinguishes between experience and exposure. Experience, of course, looks to the past and considers the probability of future outcomes based on occurrence of historical events. Exposure, on the other hand, considers the likelihood – and potential risk – of an event that history (especially recent history) may not reveal. Buffett argues that in 2001 the insurance industry assumed huge terrorism risk without commensurate premiums because it was focused on experience, not exposure.”

13- “If the stock market is a system that emerges from the interaction of many different investors, then reductionism – understanding individuals – does not give a good picture of how the market works. Investors and corporate executives who pay too much attention to individuals are trying to understand markets at the wrong level. An inappropriate perspective of the market can lead to poor judgments and value-destroying decisions.”

14- “The stock market has all of the characteristics of a complex adaptive system. Investors with different investment styles and time horizons (adaptive decision riles) trade with one another (aggregation), and we see fat-tail price distributions (nonlinearity) and imitation (feedback loops). An agent-based approach to understanding markets is gaining broader acceptance. But this better descriptive framework does not offer the neat solutions that the current economic models do.”

Regards,

Omar Halabieh

More Than You Know

More Than You Know

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