Episode 121 -- Michael Mauboussin (57:11)

Pronounced Mo-bisin (like Larry Curly and Mo)
Works for Credit Suisse
Liberal arts major
Did training program at Drexel Burnham Lambert
Gravitated to research
Junior analyst job
Hired by First Boston, early 1990s
Morphed into a "Strategist"
Teaches at Columbia Business School
25 years of teaching security analysis
Kahneman, Tversky behavioral studies: humans rely on rules of thumb with decision making
Humans have cognitive limitations
Auditing quality of decision making
Valuing process over outcomes
How much of a role did luck play?
Heuristics and biases -- shorthands lead to biases
Prospect Theory
Overconfidence -- projecting narrow outcomes
Confirmation bias -- we seek information that confirms view, dismiss new information
Recency bias -- weighting recent events, not a larger sample size
How to combat confirmation bias? Keep an open mind
Phil Tetlock -- "beliefs are hypotheses to be tested, not treasures to be protected"
Bayes Theorem -- new information, update views
Your views should be tenuous [tell that to a priest!]
Framing -- how you present the problem skews things
Intuition is robust in a stable or linear realm (chess)
Usefulness of checklists -- pilots have them, keeps them consistent
Do-confirm checklists
Read-do checklists (for emergencies)
Stock down 10% versus the market, investors take out their read-do checklist to react calmly
"Think twice" -- inside outside view
Analysis paralysis -- some domains more information *isn't* better
Paul Slovic -- tested handicappers, accuracy of bets didn't get better with additional information, but confidence soared
Professionals don't want too much information, just the key information
How to combat indecisiveness: do you need to move or not?
Technique to get you moving: write down plus / minus columns
Techniques to surface alternatives: "pre-mortem" pretend decision worked out *poorly* by projecting into future
Spend as much time as you can reading, exposing yourself to different points of view
Cognitive neuroscience
Hyperbolic discounting -- future self is good, self at moment is bad
Humans want immediate gratification while promising to be good in the future
Link things you like with things that you don't like
Treadmills (hard) and podcasts (fun) -- one way to motivate self
Split brain patients -- left versus right hemisphere activity
Left hemisphere has the "interpreter" -- links cause and effect
Humans love stories (narratives)
Statistical arguments are palid, while a story is salient
Be a good storyteller, don't spout dry statistics
"Tales from Both Sides of the Brain" -- good book
Gazzaniga Scientific American articles
Keep a journal of your decisions (date and time it)
Go back and audit quality of decisions
Hindsight bias and creeping determinism
Skill dominant games -- the best player wins
But games where probability matters, process is all important
Good outcomes, horrible process
Adherence to good process, will win over time
World is dynamic, can only have components of process
Process must be transparent, economically sound, mathematically devised, repeatable
Fascination with Richard Dennis, Turtle Traders
Curtis Faith book on Turtles
Skill versus Luck
Mauboussin an avid athlete
Loved Michael Lewis's Moneyball book -- sticking to process
Taleb's 2001 book didn't quantify where the randomness was [annoying]
Short run luck will dominate, long run will zero out; then skill will shine
Techniques to isolate skill from luck
82 NBA games a season, large enough sample to work with
All great investors think probabilistically
All great investors always have odds in their favor (positive expected value)
All great investors understand the role of time
Live to see another day -- "preserve optionality"
Puggy Pearson advice best: Understand the 60:40 end of a proposition (edge), money management (how much to bet), and knowing yourself (know your psychological shortcomings)
www.michaelmauboussin.com
Twitter: @mjmauboussin