Value Investing: Tools and Techniques for Intelligent Investment

Chapter 16. Process not Outcomes: Gambling, Sport and Investment!^[16]

Watching the Olympics and listening to several of the successful athletes, one of the inane questions from the interviewers often seemed to be, 'What was going through your mind before the event? Were you thinking of the gold?' The response time and again was the competitor was focused on the process, not the outcome. So it should be in investing as well. We have no control over outcomes, but we can control the process. Of course, outcomes matter, but by focusing our attention on process we maximize our chances of good outcomes.

• Paul DePodesta of the San Diego Padres and Moneyball fame relates the following story on playing blackjack.

  On one particular hand the player was dealt 17 with his first two cards. The dealer was set to deal the next set of cards and passed right over the player until he stopped her, saying: 'Dealer, I want a hit!' She paused, almost feeling sorry for him, and said, 'Sir, are you sure?' He said yes, and the dealer dealt the card. Sure enough, it was a four. The place went crazy, high fives all around, everybody hootin' and hollerin', and you know what the dealer said? The dealer looked at the player, and with total sincerity, said: 'Nice hit.' I thought, 'Nice hit? Maybe it was a nice hit for the casino, but it was a terrible hit for the player! The decision isn't justified just because it worked.'

• Psychologists have long documented a tendency known as outcome bias. That is the habit of judging ...