Michael Mauboussin’s More Than You Know: Finding Financial Wisdom in Unconventional Places


Jason Collins


April 12, 2018

Michael Mauboussin’s message in More Than You Know: Finding Financial Wisdom in Unconventional Places is that we need an interdisciplinary toolkit to give us the diversity to make good decisions. This is not diversity in groups, but diversity in thinking. You need diverse cognitive tools to deal with diverse problems.

The book is a series of essays that Mauboussin wrote for a newsletter over a dozen years or so when he was at CSFB. Given his background in investment management, there is a heavy focus on investment decisions. However, the tools he discusses are relevant for most decision-making domains, be that as a manager, parent, employee, or so on.

Mauboussin draws his interdisciplinary tools from four main areas, around which the essays in the book are arranged.

The first set of essays, on investment philosophy, largely concern probabilistic thinking. Focus on the process, not the outcome. If you judge solely on results, you will be deterred from taking the risks necessary to make the right decision.

In this vein, don’t set target prices for shares - an estimate of how you will believe a company will perform. Rather, provide a range of prices with associated probabilities. This allows you to invest knowing the downside probability, and to assess your choices in the knowledge that some decisions will have unfavourable outcomes.

One interesting thread to these essays is what amounts to a defence of Mauboussin’s occupation, investment management. Many people (myself included) see investment management performance as largely the outcome of luck. Mauboussin argues for the presence of skill (in at least some cases), with long streaks requiring (to paraphrase Steven Jay Gould) extraordinary luck imposed on great skill.

One limb of Mauboussin’s argument is the 15 consecutive years of market out-performance by Bill Miller, a fund manager at Legg Mason (where Mauboussin worked at the time the book was published). Getting 15 consecutive heads when tossing a coin is a one in 32,000 proposition. If your coin has only a 44% chance of coming up heads (the average probability of a fund outperforming the market over that stretch), a streak of 15 has a probability of one in 223,000. That number balloons to one in 2.3 million if you take the average probability of a fund beating the market in each individual year (in a couple of years less than 10% of funds beat the market).

Given these odds, Mauboussin argues that it is unlikely that Miller was effectively flipping a coin. Miller’s skills meant the odds were actually less daunting. Yes, he needed luck, but there needed to be skill underneath to realise the streak.

I’m not sure I buy this argument. This 15 year window is only one of many available. There are many funds. (And I have just found this - someone doing the numbers to get the odds of 3 in 4 of a 15 year streak by someone at some time.)

A contrast to the Miller story comes later in the book, when Mauboussin notes the trading success of Victor Niederhoffer in a different light. Niederhoffer averaged 35% per year returns from 1972 to 1996 (says Wikipedia), but this all came crashing down to nothing in 1997. He built another fortune to then lose in the global financial crisis. Mauboussin uses Niederhoffer’s story as an example of the fat tails of asset price movements, a pattern of many small changes, and a small but larger than expected number of large changes. To use Nassim Taleb’s framing, Niederhoffer was picking up pennies in front of a steamroller. (And on that point, Miller’s record since his streak is not so great.)

The second set of essays draws on psychology. This partly draws on the heuristics and biases program of Daniel Kahneman and friends, but Mauboussin ranges over wider territory. He draws in literature on animal behaviour, such as the herding behaviour of ants and the stress response of animals, and on the literature in naturalistic decision-making. He also has a keen appreciation of the fact that many of these decisions occur in systems, meaning that individual decision making flaws don’t necessarily lead to poor aggregate outcomes.

The third set of essays innovation and competition, has a game theory and evolutionary thread. The last set is on complexity, which contains both a warning about seeing cause and effect in complex systems, and a suggestion that some of the work in the complexity field gives a lens to understand the patterns we see.

Some of these essays deserve posts of their own, so I won’t go into any in-depth except to make a general observation. I am a fan of interdisciplinary approaches to problems, but parts of the book, particularly these latter sections, hint at why they aren’t adopted. Many times you get an interesting angle of looking at an issue, but it is not clear what you should do differently.

Partly this is a result of the origins of the book. Each essay is around two thousand words (guessing), so each gives a taste of a topic but little depth. One essay tends not to build on another.

That said, much of the advice is to effectively do nothing. That is valuable advice. If you want to read media accounts about share market moves, recognise that this is entertainment, not information. Disentangling cause and effect in a complex system like the share market is difficult, if not impossible, so stop telling stories.

Mauboussin also warns in the introduction that some ideas may not be useful right away. Some may never be useful. You are building a toolkit for future problems that you haven’t seen yet.

As a closing note, Mauboussin references many other popular science books. Given some of the essays must be 20 years old, I had not heard of most (which might say something for the longevity of popular science books). I’ve added a few to the reading list, but it will be interesting to see how they have held up through time.