Take a lesson from George Costanza: Do the opposite

Legg's Mauboussin says using counterintuition could lead to much better investment outcomes

Nov 14, 2012 @ 3:44 pm

By Jason Kephart

Advisers could learn a thing or two from George Costanza in “Seinfeld” when it comes to investing.

Faced with unemployment and living with his parents, Mr. Costanza, one of the neurotic co-stars of the 1990s hit TV show, decided to start embracing his counterintuition — doing the exact opposite of what he would usually do. It landed him a job with the New York Yankees.

Advisers might not want to go as far as doing the exact opposite as their gut tells them when making investment decisions, but using counterintuition could lead to much better outcomes, Michael Mauboussin, chief investment strategist at Legg Mason Capital Management, said at Charles Schwab & Co. Inc.'s Impact 2012 conference today in Chicago.

There are two main ways people look at making a decision, he explained.

The first, and most common, is the “inside view,” which is when people typically gather lots of information, combine it with our own input and then project into the future.

The problem with making decisions using the inside view is that it puts too much weight on an individual experience, rather than looking at all the factors available, Mr. Mauboussin said.

“We love to think of ourselves as independent and fact-based, but much of our decision making is based on the situation we find ourselves,” he said.

That's why advisers should begin to look at things from the “outside view,” which looks at a problem from the context of what's happened in similar situations in the past. That allows advisers to ask: “When other people have been in this situation, what happened?”

Three illusions

When looking at investment decisions from the outside, it reduces the three main illusions that cloud individuals and allows them to make better decisions.

The three illusions:

Superiority: The majority of people tend to think of themselves as better than average.

Optimism: Individuals tend to be overly optimistic about their own situations.

Control: When people feel in control of a situation, they tend to predict a higher outcome of success.

Of course, using the outside view is a lot easier said than done, and that's because it's based more on statistics, which people are inherently bad at.

“We love stories; we're bad at numbers,” Mr. Mauboussin said.

There are some things advisers can do to help themselves, however.

The first is to keep an investment journal.

“Whenever you make an investment decision, write down what you think is going to happen and why you think that's going to happen,” he said. “If you keep one and start to flip back after six or nine months, you'll probably feel embarrassed.”

Another tip is to start doing pre-moratoriums.

Before making a decision, project into the future a year and assume the investment turned out poorly. List out all the reasons that that could happen. The exercise can help advisers identify up to 30% more alternative investment ideas, which may in fact be better.

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