What’s Luck Got to Do with It?

Daniel Kahneman, the father of behavioral economics and the winner of the 2002 Nobel Prize in economics, recently addressed hundreds of financial professionals at the IMCA 2015 New York Consultants conference in Manhattan. The Princeton University emeritus professor of psychology and author of the recently published book, Thinking Fast and Slow had a simple message: “Investors know less about investing than they think.” And, because the future is unpredictable, he says luck, rather than skill, most often contributes to positive outcomes.

My approach to investing has never been about trying to find the next hot stock or the next hot sector. Rather, we focus on what we can control–creating a diversified portfolio, controlling the cost of funds, and minimizing the amount of trading. We favor passively managed funds that aim to deliver market returns rather actively managed funds that have higher costs and attempt to beat the market.

It’s also important for investors to take seriously Kahneman’s caution to guard carefully against the hindsight bias that puts the past in an optimistic light, encouraging us to forget mistakes and play up seemingly correct calls. In his talk, he used an example from the Super Bowl. It was not, he said, superior play by the Patriots that secured their win. Rather, a horrible play call by Seattle handed the Patriots their fourth Super Bowl victory. While I agree with that assessment, it’s not the entire story. And, in fact, the bigger picture underscores the value a trusted advisor brings to the investing arena.

Asked how a rookie was able to make the game-winning interception, Patriot Malcolm Butler said he’d watched so much tape of Seattle’s play formations that he knew the throw was coming when everyone watching the game was anticipating a run. Butler was then asked how his nerves didn’t get in the way of making the catch. He responded that he knew he’d put in the time watching film and had practiced so much, that when the throw came, he wasn’t nervous. Rather, he just “did his job.” Similarly, working with a trusted advisor who has experience with market volatility can guide investors through market highs and lows and ensure their nerves don’t get in the way of solid decision making. We put the time in, on and off the field, to help ensure that our clients focus on what is important to them.

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