Choose The Game You Play Wisely

Oct. 12, 2015 7:10 AM ET1 Comment
DLP Investing profile picture
DLP Investing


  • Expert decision making, especially in the stock-picking world, is not reliable.
  • Stock picking by speculators is not a skill that can be mastered.
  • Value investing needs to be thought of in the context of playing the long-term odds.

Daniel Kahneman's remarkable work, 'Thinking Fast and Slow', discusses in detail overconfidence in the professional world and when experts can be trusted in their predictions. He had collaborated with psychologist Gary Klein on a project that researched this very question, as Klein was prone to believe that expert intuition was to be trusted when a decision had to be made, while Kahneman had concluded that algorithms are more trustworthy than human intuition.

Their work was interesting, to say the least. Kahneman felt that algorithms could drown out the noise that human emotion brought to the decision-making process, but Klein laughed at the very thought of a machine making a critical decision in the heat of the battle. After numerous discussions and long debates, the question was asked what type of "expert" they were analyzing? Klein had in mind nurses and fire fighters and the like; people who had to make split-second decisions because lives depended on it. However, Kahneman had been thinking of political science forecasters and stock pickers.

Kahneman had earlier done studies at a financial firm, analyzing the company's stock advisors. His findings were not encouraging. Kahneman had been given data on the firm's advisors and their records over the course of an 8-year period. When the rankings of the advisors were compared year by year, Kahneman found a correlation .01 - basically showing that the stock-picking skill was non-existent within the firm. Those who did well one year were likely to do worse the following year and vice versa; regression to the mean prevailed. He notes that the executives at the firm as well as the advisors basically swept the findings under the rug. They were collecting fees from their clients anyway, right?

Kahneman and Klein concluded that stock picking occurs in a low-validity environment. There are no

This article was written by

DLP Investing profile picture
I am a civil engineer and individual investor. I spend a substantial amount of time reading and researching commodities, macro economic trends, and value investing strategies. With my background in the construction industry, I am able to analyze real world information compared to data provided by media outlets. I plan to eventually transition my career towards the financial sector.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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