Michael Mauboussin is considered an expert in the field of behavioral finance and has some famous books on the topic including, Think Twice: Harnessing the Power of Counterintuition and More More Than You Know: Finding Financial Wisdom in Unconventional Places.
From 2009 Think Twice: An Interview With Michael Mauboussin
Think Twice: An Interview With Michael Mauboussin
Michael Mauboussin has been an adjunct professor of finance at Columbia Business School since 1993 and is on the faculty of the Heilbrunn Center for Graham and Dodd Investing. In 2009, Michael received the Dean’s Award for Teaching Excellence. BusinessWeek’s Guide to the Best Business Schools (2001) highlighted Michael as one of the school’s “Outstanding Faculty,” a distinction received by only seven professors.
AC: Prior to your current role you were Managing Director and Chief US Investment Strategist at Credit Suisse. Can you tell us about this role?
Michael Mauboussin: I started at Credit Suisse Group AG (ADR) (NYSE:CS) as an equity analyst following the packaged food companies. I loved being an analyst, and was especially interested in the investment process – including how markets work, how to value businesses, and how to assess their competitive positioning. Eventually, the firm migrated my role from working on an industry to developing thoughts on investment process.
In this sense, I was unlike a traditional strategist. Most strategists spend time figuring out targets for the S&P 500, where earnings are going, or determining sector weighting. I did none of those things. I tried to focus my work on the essential building blocks of a successful investment process.
AC: Where did the idea for the Think Twice book come from?
Michael Mauboussin: In the early 1990s, I started teaching a course at Columbia Business School that is ostensibly about how to be a good investor. In the early years, I focused a great deal on the mechanics of investing – how to do a proper valuation, competitive strategy analysis, financial statement analysis, and the like. But over the years, I came to the clear realization that mastering those mechanics was not sufficient to being a great investor. What separated the good from the great investors had little to do with their analytical tools but a great deal to do with how they made decisions.
So over the past decade or so I turned my attention more to the psychological parts of investing. This coincided with the rapid growth of work in behavioural economics. My basic observation was that the successful participants in all probabilistic fields, including handicappers, poker players, sports team managers, and investors, had more in common with one another than they did with the average participant in their field. So I wanted to understand how those successful people thought differently than the rest of us.
So Think Twice is a consolidation of that inquiry. The fact is there is a big difference between intelligence, as measured by intelligence quotient, and good decision making. And while Think Twice is clearly applicable to investors and business people, the lessons apply for all professionals who make decisions.
AC: How difficult is it for us to change our approach to decision making?
Michael Mauboussin: I think the evidence shows that it is really hard. Our minds are wired a certain way, and change does not come easily. In the book, I recommend three steps to improving your decision making. The first is to recognize situations where you’re likely to make a mistake. The idea is to build a mental database of potential problem areas. If you can do this effectively, you’re already a step ahead of the game.
The second step is to recognize the problem areas in context. It turns out these situations show up in different guises. But if you are versed in them and alert to their presence, you will see them everywhere. You’ll see them in your professional life, your personal life, and when taking in the news. I have enjoyed picking out these mistakes in various realms. The final step is to take measures to mitigate these mistakes. Each chapter ends with some concrete tips on how to deal with the mistake discussed. So you need understand the potential problem, pick it out, and deal with it properly.