BOOK REVIEW: More Than You Know

Dharmendra D.

More Than You Know: Finding Financial Wisdom In Unconventional Places
By Michael J. Mauboussin; Harper Collins;
Pages: 328; Price:  Rs 395

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Michael J. Mauboussin, the author of More Than You Know, is an adjunct professor at Columbia Business School, teaching a course on Security Analysis in addition to being chief investment strategist at Legg Mason Capital Management. He is on the Board of Trustees and Science Steering Committee at the Santa Fe Institute, a leading center for multi-disciplinary research in complex systems theory.

More Than You Know is one of those non-fiction books that you start reading on a Sunday for light reading, but realise that you can’t stop till you are finished. The Observer summed up Alberto Manguel’s A Reading Diary as “If you don’t have room in your case for twelve of your own favourites, this would be the best substitute.” Mauboussin’s book is your substitute for not having to read a host of other excellent works on finance for the intelligent and not-so-intelligent investor. The sheer breadth of disciplines whose wisdom the author has distilled into this work is staggering.

The book rests on the concept of consilience — the unity of knowledge and makes a strong case for bringing insights from various disciplines to solve problems better, although the book is devoted to investment. As the author himself says, you will be a better investor, executive, parent, friend, person — if you approach problems from a multidisciplinary perspective.

The book is divided into four main sections — Investment Philosophy, Psychology of Investing, Innovation and Competitive Strategy and finally Science and Complexity theory. Each of these sections in turn contains several short essays, some of which were originally written while the author worked at Credit Suisse as part of an offbeat offering named appropriately enough, The Consilient Observer. The eclectic nature of the book lends itself to being read as easily from front to back as from back to front and as the author recommends, one could just look at the table of contents, find something that catches one’s fancy and dive in. The author is most impressive and convincing in the first half and to a lesser extent in the latter half.

Investment Philosophy begins with a fundamental examination of a 2 by 2 matrix of processes and outcomes, articulating why the house always wins in a casino. The author stresses on the value of starting with fundamentally sound principles when one begins investing, since good processes will eventually help realize good outcomes. He then moves to the distinction between the investment profession and the investment business. As he puts it, the problem right now is the tendency to concentrate on the business at the expense of the profession. Although the essay was written a while ago, the telling comment couldn’t have been timelier. The author dazzles the reader in this part of the book busting popular notions such as the hot streak or hot hand and our blind belief in experts based on statistical studies and experiments. He also explains relatively less known phenomena (at least to generic readers) such as myopic loss aversion, which explains why people refuse to take risky bets despite the promise of large returns — famously described by the economist Prof. Samuelson using the allegory of a lunchtime bet with colleagues over a coin toss.

The Psychology of Investing examines investing from the lens of behavioural finance and draws inspiration from Keynes’ famous expression about the market as a beauty contest and how investing is not about picking who you think is the best or even what others would be picking as the winner. The author uses examples ranging from Brian Arthur’s El Farol bar in Santa Fe, New Mexico, where one is confronted with the decision of whether to go to the bar in anticipation of it being packed to a startling anecdote involving traders from the New York Mercantile Exchange and Marines, to illustrate decision making processes and how they could be better. In the aforementioned anecdote, the NYME’s traders beat the Marines at trading first and then shockingly at war games, where the latter would have been expected to trounce the civilians. Further, the author describes how we mix up strength of evidence with the weight of the hypothesis to illustrate how bad decisions can be made.

Innovation and Competitive Strategy draws on Game Theory, expectedly amongst other sources of inspiration while the author discusses the role of innovation in company’s abilities to offer better returns to shareholders. In this section the author makes up with variety what he lacks in freshness, using the by-now-familiar examples of Tiger Woods’ astonishing maiden triumph at the Masters, Deep Blue’s triumph over Kasparov and the Goldilocks expectation, but challenging conventional notions of the use of P/E ratios as well as growth and returns expectations for companies based on history. The author extends this to explain why larger companies have slower growth rates and makes a bold strike about how historically, companies have tended to overestimate their long term growth rates. There is a lesson for more than one category of investor in this lesson.

In the final section, the author treads a much beaten path discussing social networks and complexity (familiar to readers of The Lost World by Michael Crichton) and the utility of collective decision making, as opposed to individuals or for that matter, even experts. Although the mention of fractals and Mandelbrot (the genius and polymath), St. Petersburg paradox (named for a mathematical problem posed by Bernoulli to the Russian Imperial Academy of Sciences), Laplace’s demon (an omnipotent intellect first imagined the celebrated French mathematician) are sure to intimidate the not-so mathematically or philosophically inclined, the lucidity of the author wins over the reader.

The author returns to the theme of why humans opt for explanations which might even erroneously explain certain phenomena in the quest to connect causes to effects, several times in this section. And for the artsy types, there is the explanation for the allure Jackson Pollock’s deceptively simple works — who would have thought they had something to do with fractals?

The author thus makes a compelling case for the value of consilience in our lives in general and investing in particular and thus, the best way to sum the book would be to borrow a quote from one of its chapters

The more that you read, the more things you’ll know
The more that you learn, the more places you’ll go
—    Dr Seuss’ I can read with my eyes shut!

And for the reader who wanted to know more, the author has supplied nearly 70 pages of further reading and references!