Michael Mauboussin proposed an interesting test for skill, which is whether it is possible to lose on purpose. Presumably one can lose vs a benchmark by racking up transaction costs indiscriminantly, so there is some skill involved, but it’s also true that randomness can hit you in a way where you fail at losing, so there’s a fair amount of luck involved too.
I ran a weekly NFL picks pool in the office a few years back. We included an entry based of a series of coin tosses each week and I also included one entry that tried to lose on purpose(these were included so we could mock and ridicule you for being awful, but also because we had discussed Mauboussin’s skill/luck ideas). The coin toss won the week twice, and the intentionally bad picks tied for the weekly high total once. This was against the spread picks, so things tend to cluster near 50%. I think the intentionally bad picks ended up in the middle third of the entries for the season.
Bchad, by the “add-ons” I was extending my analogy to the alternatives space by suggesting that real or perceived complexities in sophisticated investment strategies are a type of conceptual, service-based add-on to the basic investment concept of “grow my money.” There’s autopilot (S&P500 ETF or mechanical target-date fund), then there is souped-up, all-hands-on-deck, vol-swap, short book sophistication at the other end of the spectrum.
Of course, if the person came in the dealership to buy the base-model sedan and left with the premium trim SUV, they may be disappointed to learn that the SUV can’t go any faster than the sedan even though it cost them twice as much. But maybe safety is their concern. In this case, an SUV can be a good choice. But the customer is not always clear that the things they are being upsold on (chrome 22" premium wheel package) are directly related to the true objective they are telling themselves (safety). The waters get muddied to process buy decisions when the number of separate product feature considerations popcorns out of control.
It’s kind of like football coaches.
Wouldn’t that just note good odds making though? But I see your point and that is very interesting. I did a college pick em this year and even going without a spread it was incredibly hard.
It’s largely because the decision maker is blameproof if they choose someone who has failed before. Failing in an original way is ridiculed. Failing the way others have failed is not. It’s why wages are sticky and meaningless title promotions are important.
Edited to add, I meant to start this comment with “I think it’s…”
Yeah, it’s capturing a lot of things other than just the pickers ability. Hell, the part where I was the one trying to be :intentionally: bad was likely skewed a ton because I am in fact bad unintentionlly, so we’re starting from a bad spot.
Yep. Better to conventionally fail than to unconventionally succeed.
we give her a second, or third, chance because we love to romanticize winning calls. whether we make them or other people make them. hearing a story about losing calls is not exciting because the storyteller doesn’t want to tell it and we don’t want to relate to it. we all like to dream of the chance of making a big call and becoming fabulously rich as a result. it’s like winning the lottery. even smart people play the lottery.
^No, we give her a second or third chance, because if we don’t, JBL will lay the smack down on our candy asses!!!
Oh wait…wrong superstar…
I disagree. it’s harder to defend your decision-making rationale when picking a “failure”. I see it as analagous to investing in a beaten down, undervalued stock vs an expensive growth stock. It looks worse if the beaten down stock turns out to be a true loser and hits the pink sheets than if the growth stock plummets. Then you can say, “nobody saw that one coming…”
I was specifically referring to the football coaches example, but you see it in all sorts of management selection decisions. Athletic directors, coaches, university presidents, CEO’s, politicians, etc. Once a person has been deemed a viable candidate for a role by some other organization with legitimacy(another team, another company, etc) their success or failure becomes irrelevant, at least through the first few success/failure cycles.
If Bernie Madoff were not physically in prison, serving 150 years, someone would have given him a second chance in some bigshot role.
Seriously though, in many situations it is NOT that the person just got unlucky. It’s that they invested 20% of the portfolio in some expensive hype pharma stock with questionable financials, that despite being overpriced garbage actually shot into the heavens, but they still didn’t have the sense to take the money and run…eventually it crashes due to some fraud accounting or whatever. “Who could have known?”. 
I’m not sure that Bernie would get another chance. There is a difference between investing in something and getting caught up in the hype and making a dumb decision vs doing what Bernie did, which was complete unadulterated fraud. If you make bad calls, you have a much better chance of getting a second chance than if you actually commit fraud with other people’s money.
My point about Bernie Madoff was just how the bluster of self confidence takes people in.
I suppose if your point is that that bluster will still work on some people, you might be right that there would be some people who would be taken in a second time, even by the same person, but I don’t think he would be able to obtain the scale of investor he had before.
Though Michael Milken might be an interesting parallel. I think the issue with junk bonds in the 1980s was more that they were overhyped, though there probably was some fraud in there as the thing unravelled. I don’t remember the details.
No chance madoff would get another chance.
t’s one thing to make a call and fail. it’s totally different to run a giant scam.
the madoff example is not really discussable. we can’t assume he commits this nearly unprecedented fraud and then discuss what would happen if this gigantic fraudster didn’t get a million years of jail time. it’s like saying, would Hitler get another chance to run a country? no, he died, and if he didn’t, he would’ve been hanged anywhere possible.
if Madoff did something far less egregious, we could discuss. anyone convicted of any sort of major securities fraud is barred for life from the security solicitation process.
That’s why I mentioned Michael Milken, though I don’t recall whether there was genuine fraud there or if it was just borderline.
Isn’t John Meriwether on his fourth fund? You know, after having bankrupted the first three?
The guy I know is barred for life, from one country, so he just focuses on all the other countries. There’s always another sucker, err until you are in prison and can not access the suckers. But almost nobody involved in scams and/or criminal incompetence ever actually goes to prison.
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