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The Richards Report episode 25: Cade Massey

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Click to listen to the latest episode of The Richards Report featuring the Wharton School's Professor Cade Massey.

The Richards Report podcast is all about investing and how you can improve the decisions you make around investing. But you’ve probably picked up by now that I touch on another passion of mine from time to time too, and that’s sport (in particular AFL football). Despite the investing and sporting worlds being very different, they also share quite a lot of similarities.

In particular, they’re both immensely competitive. In both investing and football, decisions need to be constantly made in a world of uncertainty, and with a lot of noise.

With hindsight people might look back and think that decisions were easy at the time, but they’re usually not. The field of behavioural economics calls it ‘the curse of knowledge’ in that we have a hindsight bias that causes us to believe that decisions made in the past were easy to predict.

This week my podcast guest is Cade Massey, a professor at The Wharton School at the University of Pennsylvania in the US. Cade teaches about decision making, influence and negotiation. He also works with NFL teams on how they can improve their decision making when it comes to recruiting as it’s so important and there’s no crystal ball.

Cade teaches about making evidence-based decisions and using rules (or algorithms) to improve the conclusions you draw. He has also done a lot of research in the following areas:

Algorithm aversion

Cade has produced two research papers on something he calls  algorithm aversion. Cade has found that, when deciding between two options (a human or an algorithm), people often incorrectly favour the advice of human over the algorithm even if it’s proven the algorithm is more accurate. It’s quite fascinating from an investing point of view as many people believe they can outperform the market despite significant volumes of research and evidence that show that ETFs and index funds outperform most professional investors.

The Loser’s Curse

Cade did some famous research 20 years ago with Richard Thaler (Nobel Prize Winner 2017 and author of Nudge) about how football teams over-value high draft picks (they called it ‘The Loser’s Curse’). Their findings revealed that teams should actually trade down the order for lower draft picks, not up for higher draft picks, to create value.

As Cade states in his research: “Rather than a treasure, the right to pick first appears to be a curse. If picks are valued by the surplus they produce, then the first pick in the first round is the worst pick in the round, not the best. In paying a steep price to trade up, teams seem to be getting the sign wrong!”

Cade mentions that recruiters are on board with trading down, until the draft/trade period comes along, and their instincts kick in. That is, they start to waver from their rules because their emotions take over as some recruiters get quite attached to certain players. This can happen with investing too and is often referred to as ‘the confirmation bias’. There’s a line in Cade’s research that I really like: “The more information teams acquire about players, the more overconfident they will feel about their ability to make fine distinctions.”

The importance of evidence/data

As hard as it is to choose the next great footballer Cade thinks that it’s actually easier than picking the next great CEO as there’s so much data in professional football. We discuss the New England Patriots and how they’ve been able to sustain success using evidence to support their decisions and not just following conventional wisdom.

Summary

So why don’t all sporting teams or investors just follow the evidence and use rules to form the basis for their decision making? Well, there’s a great line from Warren Buffett that I like: “What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.”

If you liked this episode then check out a previous episode I recorded with Chris Keane last year about recruiting in AFL and using data to support decisions.

Cade can be found on Twitter: @bcmassey

He also has a popular podcast called ‘Wharton Moneyball’.

If you would like to listen to this podcast on iTunes or view the back catalogue then click here.

At Six Park we use evidence to form the basis for our investment philosophy. We’re rules-based in that clients’ portfolios are rebalanced and traded according to certain rules that don’t waver day to day like a human can. We like to call it ‘evidence-based investing’.

To celebrate our third birthday, Six Park is waiving its management fees for three months for all new clients in May. Our first 100 new clients (or current clients who make a successful referral) will also receive a bottle of Pommery Champagne in a beautiful Hokusai gift box. If you would like to see how we would invest for you, click the "Get started" button below.

 

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