By Karen Takle Quinn, Ph.D.
Michael J. Mauboussin has a reputation for being especially good at explaining difficult concepts and showing the links between diverse ideas and fields. His 2006 book More Than You Know: Finding Financial Wisdom in Unconventional Places (New York: Columbia University Press ISBN 0-231-13870-9) has been selected both as the best book in Economics for 2006 and by Business Week as one of the top 2006 business books. He is currently Chief Investment Strategist at Legg Mason Capital Management and also an adjunct professor at Columbia University’s Business School. Originally, many of these essays were written when Mauboussin was Chief US Investment Strategist for Credit Suisse First Boston. These essays now have been updated, revised and published by Columbia University Press within 30 brief chapters divided among following four sections: "Investment Philosophy," "Psychology of Investing," "Innovation and Competitive Strategy," and "Science and Complexity Theory." In fifty short essays, Mauboussin explains many abstract and complex financial or economic concepts. Frequently he uses observations from nature, for example, the feeding patterns of ants, the strange behavior of slime mold, or the fast evolution of fruit flies to illustrate a point or to help the reader to think about a topic from a different perspective. He cites and relates ideas, illustrations and concepts from a wide range of interesting books and published papers.
In the introduction to Part I, Mauboussin suggests that "Investment Philosophy" is critical because it dictates how an investor should make decisions. He suggests that sloppy philosophy leads to poor long-term results, and that even good philosophy needs discipline and patience. Through these essays he reveals that investment philosophies have a number of common themes. Among them is that in any probabilistic field you are better off focusing on the decision-making process than on the short-term outcomes. However this can be difficult to achieve because outcomes are the objectives, and the processes are more subjective. The second major theme of Part I is the importance of maintaining a long-term perspective. Success here is dependent upon solid building blocks. The final message of this section is the importance of internalizing a probabilistic approach. Psychology teaches us that sometimes our mental hardwiring can lead us astray. We may see patterns where none exist, or we fail to see possible outcomes, or we are influenced by the way in which the information is presented. Mauboussin suggests that proper investment philosophy can help to improve the chances of long-term successes. He suggests that sometimes growing the assets is prioritized over delivering superior results for shareholders. Readers are encouraged to determine their own thoughtful philosophy and to stick with it. In this section I especially appreciated the inclusion of Christensen, Carlile and Sundahl’s well-known, thought-provoking ideas on "theory building." Chapter Four offers a clear message that good theory is dependent upon proper categorization. The author suggests that theories evolve from attribute-based categories to circumstance-based categories as they improve. Theories built upon circumstance-based categories tell practitioners what to do in different situations, while attribute-based categories prescribe action based on the traits of the phenomena. With this foundation Mauboussin then compares the process of theory building to investing. His discussion suggests that successful investors are not eclectic, as some speculators think, but rather they are more circumstance-based than attribute-based.
In his introduction to "Part 2: Psychology of Investing," Mauboussin describes the betting strategies of gambling legend Puggy Pearson. According to Mauboussin, Pearson's strategies were three-pronged, based on his knowledge of 1) the 60-40 rule, 2) money management, and 3) knowing himself. In this section, Mauboussin suggests, "Psychology may be the most underappreciated, under-taught, and under-contemplated facet of investing." He alludes to the distinction between individual and collective decisions and suggests that when dealing with markets, it’s not enough to have your own point of view; you also must consider what other people think. As Pearson once said, "Everything's mental in life." My students would not be surprised that I found Chapter 10, "All Systems Go," to be a very interesting chapter. A table comparing experiential and analytical systems caught my attention; while a chapter earlier, I was intrigued by the idea of what Tupperware parties could teach someone about investing and life. In Chapter 8 Mauboussin references a delightful book entitled "Why Zebras Don’t Get Ulcers" when discussing the problems of stress at work. In another chapter he reminds the reader that Ulysses had his crew tie him to the mast of the ship to protect him from the "call of the Sirens." He then suggests that money mangers taking a lesson from Ulysses should focus on optimizing long-term fund performance. Actually, as you read through these entertaining chapters it is difficult to not find a new perspective or insight in each.
In the introduction to "Part 3: Innovation and Competitive Strategy," Mauboussin makes a keen observation that unless you think carefully about innovation's cumulative effects, the small changes will escape your detection and you’ll end up with yesterday’s favorites. Investors must constantly keep in mind that innovation is inevitable. It results from the constant changing, combining and recombining of existing idea building blocks. The more ideas available that can be quickly manipulated to produce new useful products or services, the faster the pace of innovation. One of the especially interesting topics in part three is how to deal with change. Humans are terrible at dealing with change. Chapter 19, "Survival of the Fittest," offers the following quote from Charles Darwin’s The Origin of the Species: "It is not the strongest of species that survives, not the most intelligent, but the one most responsive to change." This chapter begins with a story about Tiger Woods revamping his swing to improve the competitiveness of his game. Mauboussin notes that Darwin saw that improving survival chances was not about smarts or strength but about being better suited or adapted to the environment. He uses the Tiger Woods metaphor to introduce the concept of fitness landscapes with their peaks and valleys. Evolutionary scientists originally developed this fitness landscape approach to help them understand evolutionary processes, especially how a species might have increased its fitness, or survival potential. Now this scientific approach has spawned interesting ways to examine corporate strategies using fitness peaks to represent high value creation potential. The industry's general characteristics are used to determine the topology of each landscape. Using this approach, fitness peaks are considered high-value, creation-potential possibilities. Three fitness landscapes are illustrated on page 131 in the graphic labeled "Fitness Landscapes and Corporate Strategy."
The essays in "Part 4: Science and Complexity Theory" offer some important mechanisms to explain how markets are both efficient and inefficient. They also examine various forms of collective problem solving, using, for example, the behaviors of honeybees and the Hollywood Stock Market. The essays in this section also offer some help to explain how markets are both efficient and inefficient, to explore empirical results that standard finance doesn’t always handle well, and to clearly show why it’s unrealistic to make simple cause-and-effect links in markets. In this book Mauboussin uses extraordinary, simple verbal images to make highly complex financial concepts easy to understand. Throughout his book, the author encourages readers to approach problems from a multidisciplinary, what some might describe as, a "systemic," perspective. Mauboussin suggests that this approach offers "the difference between moving into a fixer-upper home with a set of power tools versus a simple screwdriver." His use of mental models as tools or frameworks helps the reader to understand and apply this knowledge to existing circumstances. He strongly encourages readers to personally choose to be intellectually curious, to have integrity and patience, and to apply all of these characteristics with self-criticism. He conjectures that "you will be a better investor, executive, parent, friend--person--if you approach problems from a multidisciplinary perspective."
Included in this volume are many theories and topics; some may be vaguely familiar, while others will appear to be new, or something you have never heard about before. The author and his editors should be congratulated, because in this volume each complex idea or theory is clearly explained and positioned so each makes sense in terms of why you should be interested in understanding it, and why it has been included in this book. In the "Notes" (pages 211-236), the author has assembled an expansive section of comments, references and other sources of information related to each chapter. This section is followed by a detailed list (pages 237-256) of references and additional readings. Give yourself time to read, to think and to play with all of these ideas. Mauboussin's writing provides intellectual fun, new perspectives, what some might call "cool ideas" and even provides pathways encouraging intellectual growth. He writing is both engrossing and entertaining. He has the uncanny ability to explain what makes each topic important to his readers, while helping them to grasp the importance of understanding the interrelationships and concepts associated with each new idea. If you think about the trillions of dollars that are exchanged everyday across global markets, perhaps a truly intuitive way to view and understand our stock market is from the perspective of a complex adaptive system. On the book jacket cover, Bill Miller, CEO of Legg Mason Capital Management, suggests, "If you want to understand how the world’s best investors think, you must read this book." This is a fascinating book from the beginning chapter "Be the House," to the very last chapter, "The Pyramid of Numbers From Size, Growth Rates and Valuation." Mauboussin celebrates the mindset that the answers to most questions will clearly emerge only by thinking across disciplines. I hope many of you will find time to read this book and recommend it to others who will. It might even open some minds to seeking new knowledge pathways, not just those related to financial matters.
Karen Takle Quinn, Ph.D. can be reached at [email protected]
©2007, Karen Takle Quinn, Ph.D.
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