Library of Mistakes: How Long Is the Investment Learning Curve?
Mistakes and disappointments are not unusual in the investment world. On the contrary, it is investment successes that are rare.
Howard Marks, CFA, made an insightful observation: “. . . in order to strive for performance which is far different from the norm and better, you must do things which expose you to the possibility of being far different from the norm and worse.”
Persistent boom-and-bust economic cycles — Minsky moments — underline the numerous unavoidable challenges that investment decision makers face. Moreover, professional investors rarely have a complete understanding of their own miscalculations or those of others.
From poor analyst forecast accuracy to delivering active performance, mistakes trump successes.
The medical doctor Atul Gawande, in his book Complications, highlights the important role errors play in shaping learning outcomes. Whether it’s determining when to consult a more experienced doctor or mastering a difficult surgical procedure like inserting a central line, interning medical students often stumble. They are forced to learn the hard way.
Gawande’s book shows that a successful medical career is built on consciously improving and learning from a library of mistakes.
Finance and investing are not as critically urgent as medicine. Nevertheless, like medicine, investment decision making is nondiscretionary. But are investment professionals, like their medical counterparts, less vulnerable to mistakes as they mature and gain experience? Is there a learning curve?
We asked CFA Institute Financial NewsBrief readers how experience correlated with investment errors.
The survey results indicate a consensus that investment decision makers reduce their vulnerability to mistakes as they gain experience. But the data also suggest that experience has its limits: Almost 20% of participants — a sizable proportion — say that seasoned professionals — those with at least five years experience — are actually more prone to errors than novices and newcomers.
Which of these professional investor groups is most prone to investment mistakes?
Close to half (49%) of the 492 respondents said new entrants are the most vulnerable to making mistakes — a result that emphasizes the need for practical training to reduce the potential for errors.
Almost one in three (32%) poll takers think that professional investors with zero to five years experience are most susceptible to investment mistakes. That practical experience translates into fewer errors supports the notion that investors improve with knowledge and training and that certain investment mistakes may have an operational component.
About 9% of those surveyed believe that investors with five to 10 years experience are most susceptible to errors. This suggests an interesting possibility: Could those with less experience lack decision-making authority and thus have less agency to commit mistakes?
Lastly, one in 10 respondents believe that those with over a decade of experience are the most error prone.
The breakdown between the 81% who see experience as a potential panacea against mistakes and the 19% who believe it may actually render practitioners more error prone presents an interesting contrast. Perhaps those in the latter cohort believe that consequential decision making happens at a relatively senior level.
It is also possible that there are limits to how far learning and operational expertise can go in minimizing investment mistakes. Maybe there is a class of errors that operational expertise can’t address.
As my colleague Jason Voss, CFA, pointed out, our behavioral biases — another cause of errors — actually strengthen as we age. Maybe experiential learning can address and minimize cognitive aspects of our behavioral biases, such as how we process information. But the emotional component of decision making may leave us vulnerable to mistakes.
In Blink, Malcolm Gladwell demonstrates the important role practice plays in achieving mastery over a discipline. Gladwell highlights a 10,000-hour threshold after which a practitioner becomes an expert. Intense and conscious on-the-job learning, at some point, starts to translate into mastery: intuitive, unconscious knowledge.
But as Gawande points out in his book, we can’t say precisely how.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.