Michael Mauboussin: Investors Won’t Make Good Decisions That May Appear Wrong In The Short-Term

Johnny HopkinsMichael MauboussinLeave a Comment

In his latest paper titled – Turn and Face the Strange – Overcoming Barriers to Change in Sports and Investing, Michael Mauboussin discusses the reasons why sporting organizations and investors won’t make good decisions. The main reason is that even though their decision may be the correct one, the outcome in the short-term may appear to be wrong. Here’s an excerpt from the paper:

Successful organizations seek to learn and adapt over time in order to enable quality decisions. Good long-term results require developing strategies and tactics that add value and having an ability to execute them. An effective decision-making framework combines both elements.

One of the main lessons from this discussion is that organizations can be slow to adopt certain approaches even when analysis reveals that they add value. Reasons for this include the fact that losses often feel worse than comparable gains and the inclination to maintain the status quo. But perhaps the biggest factor is that in any field where a good decision leads to a good outcome only some percentage of the time, those who make the right decisions may suffer poor outcomes in the short run and hence look wrong.

This limited link between decisions and outcomes plants doubt in two ways. The first is the decision maker must question whether his or her process does add value. The second is that naysayers can point at short-term failure as evidence of the futility of the strategy. Overcoming these hurdles is psychologically challenging. The best way to do so is to have organizational alignment behind a commitment to improvement, learning, transparency, and accountability.

Successful long-term decision makers, including investors, are familiar with the ups and downs that come with a successful long-term record. John Maynard Keynes, an economist, wrote this about long-term investors: “For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

You can read the entire paper here:

Turn and Face the Strange – Overcoming Barriers to Change in Sports and Investing

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