Michael Mauboussin: Part 2 Of An Interview By Bob Morris, Blogging on Business
Michael Mauboussin is Chief LMCM in 2004, Michael was Chief U.S. Investment Strategist at Credit Suisse. Michael joined CS in 1992 as a packaged food industry analyst, and was repeatedly named to Institutional Investor‘s All-America Research Team and The Wall Street Journal All-Star survey. He is the author of The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing (Harvard Business Review Press, 2012), Think Twice: Harnessing the Power of Counterintuition (Harvard Business Press, 2009) and More Than You Know: Finding Financial Wisdom in Unconventional Places, Updated and Expanded Edition (Columbia Business School Publishing, 2008). More Than You Know was named one of “The 100 Best Business Books of All Time” by 800-CEO-READ. He is also co-author, with Alfred Rappaport, of Expectations Investing: Reading Stock Prices for Better Returns (Harvard Business School Press, 2001).
Michael 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. He earned an A.B. from Georgetown University. He is also chairman of the board of trustees of the Santa Fe Institute, a leading center for multi-disciplinary research in complex systems theory.
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Morris: In Think Twice, you seem to be convinced — and I agree — that most of the worst decisions are made in haste, without sufficient information, are driven by emotion rather than by reason, and are avoidable. If so, then almost anyone can avoid making such mistakes. True?
Mauboussin: Well, it’s easier said than done. But understanding the types of situations that lead to mistakes is the first step toward managing or mitigating them.
The basic point of the book is that when faced with certain types of situations, our minds will naturally think about the problem one way when there’s a better, more correct, approach. Danny Kahneman’s two systems of the mind are one way to think about it. System 1 is your experiential system. It is fast, automatic, and difficult to train. System 2 is your analytical system. It is slow and purposeful, but malleable. Kahneman’s point is that System 1 generally throws up answers that are right, and System 2 goes along. In certain cases, for example if I ask you to multiply 2,367 times 5,981, you need to recruit your System 2 to answer the problem. You can do it, it’s just you can’t do it automatically.
Think Twice is about situations where System 1 throws up answers that are wrong. Without recruiting System 2, you’ll answer incorrectly. So the idea is to learn about these kinds of situations and have a sense of when you need to slow down and recruit System 2.
There’s a very simple example of how this works. Ask the following question:
A bat and ball together cost $1.10. The bat costs $1.00 more than the ball. How much does the ball cost?
If you’re normal, your System 1 shouted an answer in your mind: ten cents. Most people, indeed, answer ten cents. But, of course, that’s wrong. ($0.10 + $1.10 = $1.20) The answer is five cents. Now this is elementary arithmetic, and certainly no challenge. But the structure of the question elicits a quick, incorrect response. My argument is that these kinds of situations are out there and you need to learn to deal with them.
Morris: What is the “halo effect”? Why and how specifically can it create problems?
Michael Mauboussin: The halo effect was a term coined by a psychologist named Edward Thorndike and was popularized in recent years by Phil Rosenzweig through his excellent book, The Halo Effect. The basic idea is than when we observe success or like something, we attach impossibly good attributes to it. When we observe failure or dislike something, we see nothing but bad attributes.
Morris: Now please shift your attention to The Success Equation. When and why did you decide to write it?
To read Part 1, please click here.
Michael cordially invites you to check out the resources at these websites:
His Amazon page
His Columbia Business School faculty page
His Santa Fe Institute page
A “foolish interview” by The Motley Fool
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