2 Investing—Profession or Business? Thoughts on Beating the Market Index

Chapters in this book

1. Frontmatter i
2. Contents ix
3. Acknowledgments xvii
4. Introduction 1
5. PART 1: Investment Philosophy
6. Introduction 7
7. 1 Be the House: Process and Outcome in Investing 9
8. 2 Investing—Profession or Business? Thoughts on Beating the Market Index 15
9. 3 The Babe Ruth Effect: Frequency Versus Magnitude in Expected Value 23
10. 4 Sound Theory for the Attribute Weary: The Importance of Circumstance-Based Categorization 29
11. 5 Risky Business: Risk, Uncertainty, and Prediction in Investing 35
12. 6 Are You an Expert? Experts and Markets 40
13. 7 The Hot Hand in Investing: What Streaks Tell Us About Perception, Probability, and Skill 46
14. 8 Time Is on My Side: Myopic Loss Aversion and Portfolio Turnover 52
15. 9 The Low Down on the Top Brass: Management Evaluation and the Investment Process 60
16. PART 2: Psychology of Investing
17. Introduction 69
18. 10 Good Morning, Let the Stress Begin: Linking Stress to Suboptimal Portfolio Management 71
19. 11 All I Really Need to Know I Learned at a Tupperware Party: What Tupperware Parties Teach You About Investing and Life 77
20. 12 All Systems Go: Emotion and Intuition in Decision Making 83
21. 13 Guppy Love: The Role of Imitation in Markets 89
22. 14 Beware of Behavioral Finance: Misuse of Behavioral Finance Can Lead to Bad Thinking 94
23. 15 Raising Keynes: Long-Term Expectations, the El Farol Bar, and Kidding Yourself 99
24. 16 Right from the Gut: Investing with Naturalistic Decision Making 104
25. 17 Weighted Watcher: What Did You Learn from the Last Survey? 110
26. PART 3: Innovation and Competitive Strategy
27. Introduction 119
28. 18 The Wright Stuff: Why Innovation Is Inevitable 121
29. 19 Pruned for Performance: What Brain Development Teaches Us About Innovation 130
30. 20 Staying Ahead of the Curve: Linking Creative Destruction and Expectations 137
31. 21 Is There a Fly in Your Portfolio? What an Accelerating Rate of Industry Change Means for Investors 143
32. 22 All the Right Moves: How to Balance the Long Term with the Short Term 148
33. 23 Survival of the Fittest: Fitness Landscapes and Competitive Advantage 153
34. 24 You’ll Meet a Bad Fate If You Extrapolate: The Folly of Using Average P/Es 159
35. 25 I’ve Fallen and I Can’t Get Up: Mean Reversion and Turnarounds 165
36. 26 Trench Cooperation: Considering Cooperation and Competition Through Game Theory 171
37. 27 Great (Growth) Expectations: On the Limits of Corporate Growth 176
38. PART 4: Science and Complexity Theory
39. 28 Diversify Your Mind: Thoughts on Organizing for Investing Success 187
40. 29 From Honey to Money: The Wisdom and Whims of the Collective 193
41. 30 Vox Populi: Using the Collective to Find, Solve, and Predict 198
42. 31 A Tail of Two Worlds: Fat Tails and Investing 203
43. 32 Integrating the Outliers: Two Lessons from the St. Petersburg Paradox 209
44. 33 The Janitor’s Dream: Why Listening to Individuals Can Be Hazardous to Your Wealth 216
45. 34 Chasing Laplace’s Demon: The Role of Cause and Effect in Markets 221
46. 35 More Power to You: Power Laws and What They Mean for Investors 229
47. 36 The Pyramid of Numbers: Firm Size, Growth Rates, and Valuation 235
48. 37 Turn Tale: Exploring the Market’s Mood Swings 243
49. 38 Stairway to Shareholder Heaven: Exploring Self-Affi nity in Return on Investment 249
50. Conclusion. The Future of Consilience in Investing 255
51. Notes 259
52. References and Further Reading 291
53. Index 315