MORE THAN YOU KNOW
Finding Financial Wisdom
in Unconventional Places
By Michael J. Mauboussin
Columbia University -- 268pp -- $27.95
The Good Draws investing wisdom from many disciplines, from cognitive science to fractal math.
The Bad Brief essay chapters at times allow for too little discussion of complex matters.
The Bottom Line Its insights sparkle--and it's even a fun read.
What does the development of human neural networks have to do with investing and markets? Everything, according to author Michael J. Mauboussin. Between birth and one's third birthday, it seems, our brains experience a huge growth in the number of synapses, or connections between neurons, followed by a pruning of the less useful links. This synaptic selection is an evolutionary winnowing that helps the individual in the struggle for survival. To Mauboussin, though, the messy and seemingly wasteful process has additional meaning: It's similar to what happens when a new industry emerges. Capital flows to the promising field despite uncertain returns. Lots of new companies are funded, and different business models are tried. Then as failed ideas are pruned, the number of companies falls. The parallels are so strong that a study of neural development yields valuable lessons for investors, says Mauboussin.
Mauboussin's More Than You Know: Finding Financial Wisdom in Unconventional Places draws investing insights from a wide range of scholarly disciplines, from cognitive science to fractal mathematics. It's also a fun read. The intellectually omnivorous author is chief investment strategist at Legg Mason Capital Management and an adjunct professor at Columbia Business School. He illustrates often abstract concepts, from the difference between risk and uncertainty to the distinction between individual and collective decisions, by drawing upon a diverse set of characters, from gambling legend Puggy Pearson to golfer Tiger Woods. "You will be a better investor, executive, parent, friend -- person -- if you approach problems from a multidisciplinary perspective," says Mauboussin. "It's the difference between moving into a fixer-upper home with a full set of power tools versus a simple screwdriver." The book's key shortcoming is that its brief essay chapters allow too little discussion of complex matters.
To be sure, in some cases the author's multidisciplinary approach is little more than a clever way to grab readers' attention. Take the chapter on "Guppy Love."
Mauboussin describes biologist Lee Dugatkin's research into how female guppies choose their mates. It seems they have a thing for bright orange males. But when Dugatkin arranged for some females to watch other females pick dull-colored mates, all of a sudden dull became hot. Mauboussin offers this as helpful in thinking about human behavior, notably in the financial markets, where imitation is also widely practiced. There, when there is too much imitation or positive feedback, the herd takes over, a bubble is formed, and a crash isn't long in coming. In this case, the scientific example does little more than reinforce what history and experience have taught generations of investors. Still, Mauboussin gets to write: "Next time you buy or sell a stock, think of the guppies."
More Than You Know consists of four parts: investment philosophy, the psychology of investing, innovation and competitive strategy, and science and complexity theory. The first of these offers a sophisticated yet understandable discussion of probability and investment choices. In his investment-psychology section, Mauboussin shows that, despite the current vogue for behavioral economics, there can still be fresh insights, as with his probe of "hindsight bias." And any investor eager for some guidance on how (and how not) to invest in an economy that values innovation and creativity should read the book's third section. It isn't easy to make money off of creative destruction. Finally, the author's fourth segment looks into the collective wisdom of markets. Mauboussin's ideas on this topic were the inspiration for The New Yorker staff writer James Surowiecki's popular book, The Wisdom of Crowds.
I must admit that I cracked open More Than You Know with suspicion, since it's a compilation of 50 essays written for a Credit Suisse (CSR) newsletter as far back as 2000. Often, such collections are full of odd, dated passions. But that's not so here. The insights sparkle, and the pieces have been revised and updated. Moreover, the book is ideal for busy people: The author invites you to start anywhere, even at the back, so you can read it profitably in small doses.
Still, there were times I would have liked more elaboration, as in a discussion of probability and stocks' "expected value." And I'm still puzzling over some ideas, like power law distributions. But maybe I just need to do further reading. I can hear Mauboussin, an advocate of the passionate pursuit of ideas, reciting to me the lines he quotes from Dr. Seuss:
The more that you read, the more things you will know.
The more that you learn, the more places you'll go.
By Christopher Farrell