Vol II, No. 6  

July 2014   



A monthly commentary for investors and their advisors about how the quirks of human behavior

drive investing...and what you can do about it



The Misbehaving Investor

Researchers have found that umpires in baseball have been systematically rewarding all-star players with better calls.


Investors can end up doing similar things in investing - when investments are chosen or sold on popularity rather than fundamentals.


All the best,

John Feb 5  

John Heldman, CFA


Dave Hutchison, CFA
Managing Director
P.S.: John was recently interviewed by the
The Manual of Ideas.  Here is a link to a video of the interview.
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All-Star Investing 


Baseball season is in full swing, so what better time than now to discuss the many similarities to investing, when my Los Angeles Angels of Anaheim - did I forget a city? - have the second-best record in baseball?  Sorry I digress.  Anyway, like investing, baseball offers strategy, statistics galore, multiple possible outcomes with probabilities to analyze, patience - it's a long season - and a little bit of luck thrown in.  See, just like investing.


I read an article in the New York Times last week about umpires.  Title: Ball? Strike? It Depends: Is the Pitcher an All-Star?  Hmm, the left side of my brain pondered.  Why would that matter?  Oh, yes, the right side replied.  People. Bias. Human misjudgment. Follow the Crowd.  Just like investing.  In short, the subconscious mind prevails in certain situations and causes highly trained and experienced umpires to make an incorrect call.


Proof?  The article cites two Northwestern Business School professors who studied data on 756,848 pitches over 313,774 at-bats in 4,914 games during the 2008 and 2009 seasons.  Probably enough data to be "statistically significant" as the professors might say.  The study adjusted for home team advantage, pitch count, right or left-handed batter, etc.  The major findings include a bias in favor of All-Star pitchers and batters.  A five-time All-Star pitcher had a 16% advantage over a non-All-Star in getting a ball called a strike.  For batters the advantage was lower but still meaningful: a five-time All-Star had a 5-6% advantage in getting a favorable ball-strike call.


Other biases discovered included a slight bias to favor the home team.  Perhaps umps, despite all of their training and outward ability to handle boos, deep-down simply don't like to get booed by the home crowd.  And in critical situations, such as near the end of the game, umpires were more likely to miss a call compared to very early in the game.  Even hardened, experienced umps can be influenced subconsciously during pressure-packed situations.


The similarities with investing are obvious.  Investors often favor the All-Stars when picking investments, buying Facebook, Twitter - or some Biotech company they've never heard of and don't know what it does - but the stock could provide them with an early retirement, so let's get in on it.  And we humans don't like to receive boos from the stock market, for example when we purchase a company and the share price declines, even though nothing much has changed with the company.  Or during significant market declines, such as 2008-2009, when we allow the short-term pressure of crowd behavior or groupthink to influence our decision-making.


One solution is to be aware of our internal biases and confront them head-on.  Recognize occasional imperfect behavior.  Then develop an objective, rational process for decision-making (no different from many other areas of life). 


Easy, right?  OK, here are a few ideas.  Stick to areas you know and understand. Follow 10 companies, not 100.  Make your own decisions about whether an investment makes sense for you.  Write down why you have made an investment - to help keep you on track when the investment environment becomes turbulent.


Like Major League umpires, investors are prone to make mistakes.  But if we try and understand the conditions that lead to mistakes and consciously work to avoid them, we'll have a much better batting average.  Who knows, you might even be called an All-Star.


-John Heldman, CFA 


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Results are presented net of fees and include the reinvestment of all income.


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