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Kahneman makes the same mistake he made decades ago, Dec 1 2011
In his study of 25 investment advisers, Professor Kahneman makes the same mistake he made decades earlier in the Israeli Army when he was assigned to determine which officer candidates would make the best officers. That earlier effort repeatedly failed because not enough information was known about the candidates. In his study of the investment advisers, Professor Kahneman found that both they and their managers were over confident about the role that skill plays in giving financial advice. What he did not know or at least does not tell us is what kind of people become financial advisers and managers of such advisers. Is it possible that they tend to be over-confident individuals to begin with? I suspect that is the case.
In The Drunkard's Walk: How Randomness Rules, Leonard Mlodinow shows two graphs comparing the performance of a large number mutual fund managers for a one year period and a longer period. The first graph shows that some did very well and some very poorly, with the rest in between. The second graph looks like noise. But if you look carefully you will see that a majority of those in those who did very well and of those who did very poorly in the first graph were also in those same groups in the second graph. To his credit, Kahneman qualifies his argument by admitting that "Some individuals did much better, others did much worse," that "The funds that were successful in any given year were mostly lucky," and that "There is general agreement among researchers that this is true for nearly all stock pickers..." (emphasis added). Since he is a psychologist, Kahneman should find out more information about who becomes financial advisers and their managers. Then maybe we would be able to predict who will do better in their jobs and Kahneman might win a second Nobel prize.