Quotes from Michael J. Mauboussin

Andrei Shleifer writes in his excellent book Inefficient Markets: An Introduction to Behavioral Finance:

To maintain an open mind about the future, it is very useful to keep an open mind about the past.

We need to work hard to fend off our natural tendency to view what happened as having been inevitable. Our minds simply want to explain what happened and close the case, but the world followed but one path among many possible ones. If we do the Rain Dance and it rains, then to the human brain, it looks like the dance caused the rain. In the more rational part of our brain, we know it's not true. Yet we dance on.

There's a quick and easy way to test whether an activity involves skill: ask whether you can lose on purpose.

Once an innovation reaches a certain level of popularity, its success is virtually assured. By the same token, great innovations can fail because the domino effect doesn't kick in.15

When luck plays a part in determining the consequences of your actions, you don't want to study success to learn what strategy was used but rather study strategy to see whether it consistently led to success.

In a probabilistic environment, you are better served by focusing on the process by which you make a decision than on the outcome

When most people come to believe the same thing, large gaps open up between price and value.

Deliberate practice works when skill dominates, while a focus on process and probability is appropriate when luck is the greater force.

However, once you realize the answer to most questions is, "It depends," you are ready to embark on the quest to figure out what it depends on.

When competing one-on-one, follow two simple rules: If you are the favorite, simplify the game. If you are the underdog, make it more complicated.

If you are the stronger player, simplify the interaction to emphasize your skill. If you are the underdog, complicate the game to introduce more luck into the outcome.

Randomness and luck are related, but there is a useful distinction between the two. You can think of randomness as operating at the level of a system and luck operating at the level of the individual.

The main issue is that putting yourself in a position to enjoy good luck also puts you in a position to lose.

There are no good or bad horses, just correctly or incorrectly priced ones. This principle holds across all probabilistic domains: again, the goal is to get more than you pay for.

Statistics don't appeal to our need to understand cause and effect, which is why they are so frequently ignored or misinterpreted. Stories, on the other hand, are a rich means to communicate precisely because they emphasize cause and effect.

Our minds have an amazing ability to create a narrative that explains the world around us, an ability that works particularly well when we already know the answer.

Researcher Ray Christian sheds some light on the possible role of the unconscious in decision making. He notes that what we perceive at any given moment—our conscious bandwidth—is an extremely small subset of the information stream flowing to the sense organs. Specifically, he estimates that the capacity of our sensory system is 11 megabits per second while our conscious bandwidth is just 16 bits per second.10

If you are the stronger player, simplify the interaction to emphasize your skill. If you are the underdog, complicate the game to introduce more luck into the outcome. Underdogs that successfully increase the influence of luck will also increase their chance of winning.

The key to statistical prediction is to figure out how much weight you should assign to the base rate and specific case. If the expected accuracy of the prediction is low, you should place most of the weight on the base rate. If the expected accuracy is high, you can rely more on the specific case.

Your only chance of winning is to adhere to the rules that you know work. Your skill can't change the odds, it can only be applied to make sure that you play the cards properly.

You have a margin of safety when you buy a stock at a price that is substantially less than its value. As Graham noted, the margin of safety "is available for absorbing the effect of miscalculations or worse than average luck.

Klarman has a wonderful line: "Value investing is at its core the marriage of a contrarian streak and a calculator."35 He's saying that you have to be different from others and focus on gaps between price and value. This idea extends well beyond the world of investing.

To overcome inertia, Peter Drucker, the legendary consultant, suggested asking the seemingly naïve question, "If we did not do this already, would we, knowing what we now know, go into it?"26