Have you ever been to a meeting like this? Ego wars, turf protection, even personal attacks are all part of the ugly, adversarial committee/office meeting scene. The boss never solicits the input of anyone in the room. He just makes an "Executive Decision."

Many years ago, Edward de Bono, a Rhodes Scholar who has written 70 books on thinking and decision-making, developed the concept of parallel thinking. The idea was to get everyone thinking about the same thing at the same time. His concept added structure and discipline to the thinking process, resulting in much more effective decision-making.

To make this abstract concept tangible, he developed six different colored thinking hats as a way to describe each way of thinking about a problem. His book, The Six Thinking Hats, has become an international bestseller and has been translated into over thirty languages. This simple tool can result in clearer thinking, better communications, and greater creativity. In September, I attended a four-day session to get certified on teaching this decision-making method. This training was nothing short of life-changing.

I'm teaching a series of free ninety-minute introductory courses starting November 5 at 5000 Monument Avenue in Richmond. If you would like more information, please contact Holly David at hdavid@togreatacclaim.com.

Labels: Edward de Bono, parallel thinking

Who's more likely to win this game? If you guessed the "naked" player on the left, you're right!

In chess, statistical analysis shows that white trumps black 55% of the time, thus, giving white the edge. The same applies to "naked decision-makers" who have the odds, that being statistical prediction methods, on their side, thus giving them a small (and sometimes not so small!), but clear edge.

Labels: chess, statistical prediction

I recently had a chance to talk to Dr. Richard Marston, the widely respected economics professor from The Wharton School, and what he told me will have major implications for investors considering "naked strategies."

Dr. Marston told me he had been hired by four family offices to oversee their investment managers. (A family office is a private investment company that manages the wealth of a single family.) Only the super-wealthy can afford family offices and gain access to this kind of investment advice. These four families clearly went the low-risk-taking, "belt-and-suspenders" route by hiring Dr. Marston to watch the people who they hired to watch their money.

You would think with all this money being spent on investment advice, the family office would have made some really top-notch investment decisions, wouldn't you? Well, it didn't work out that way.

Dr. Marston said he advised all the families earlier this February to rebalance their portfolios to their stated asset allocation. This would have meant adding money to equities. Not one of the families followed his advice. And as we all know, the market has advanced substantially since then.

While each of the families had spent a fortune on investment advice, they had not developed any "behavioral strategies" to deal with the emotional unease that comes with making investment decisions during a bear market.

These families just didn't realize that their decision-making stategies were fundmentally flawed. And they made the same thinking errors that thousands of less affluent investors make all the time that sabotage their investment results (See chapter 9 of The Naked Portfolio Manager for more information).

If those families had implemented "naked strategies" (rule-based, mechanical approaches to decision-making that are efficient, effective, and economical - you know the drill. . .), they could have avoided the types of emotionally-driven decision-making - or in this case, NON-decision-making - that even a brilliant MIT Ph.D. can't fix.

I was recently on "The Poppoff Show" with Mary Jane Popp and found it both an exhilerating and challenging experience! Mary Jane fired questions at me machine gun-style. Midway though the interview she said, "I just don't see the difference between 'naked strategies' and the traditional approach." Wow! I must have done a really bad job explaining it.

Naked strategies are, again, rules-based methods of coming to a decision based on predetermined criteria. Traditional methods, on the other hand, often have no framework for the manager to make a decision. The manager simply does the best he or she can based on the information available, including his or her training, education, and experience as well as his or her biases, prejudices, and idiosyncratic decision-making tendencies.

We need human judges for our society to function. We can't make all of our decisions based on rules/naked strategies. But there are times when rules simply are the best way to make decisions. The key is to pick the right decision-making method for the particular situation.

I explained to Mary Jane that using naked strategies was a very efficient, cost-effective method of coming to a decision - a method that is not used nearly enough on Wall Street.

The superiority of naked strategies versus human decision-making is well documented. Over fifty years ago, noted psychology professor Paul Meehl wrote a revolutionary book on naked decision-making (he referred to it as "statistical prediction") called Clinical vs. Statistical Prediction: A Theoretical Analysis and a Review of the Evidence, and since then, hundreds of studies have been done that validate the superiority of this method of making decisions. Yet Wall Street continues to ignore this important work.

After I got finished with the interview, I thought about the story of Moses. Remember when God asked him to lead the Isralites out of Egypt? He responded, " Not me Lord." But he became the messenger.

I don't know why the advantages of naked investing have been ignored for so long and why, with all the books written on investing, no one covered this important topic before. But I am going to make it my mission to educate the investing world about this topic. I am no Moses, but I have Twitter, Facebook, this blog, and its loyal readers. With your help, we can change the way people manage their money for the better, one investor at a time.

Labels: Moses, Paul Meehl, statistical prediction, Wall Street

Labels: Blink, decision-making, Goldman chest pain decision aide, judgement, Malcolm Gladwell, rules, Super Crunchers, Supreme Court, variables

The Nobel selection committee choice of Barack Obama exemplifies characteristic human thinking errors that lead to poor decisions. This year the committee had a record 205 nominations. While we won't know for 50 years who all the people were who were nominated (the committee seals the nomination list), we do know that by rule that nominations were closed on February 1 of this year. At that time Obama had been President for exactly ten days. Recency error is the tendency to weight recent events more heavily than past prior events, even if the prior events are more important. In the past the Nobel Prize has gone to people like Mother Theresa, Nelson Mandela, Jody Williams ( a Connecticut teacher who formed an international organization to ban land mines ) and Dr. Marin Luther King. All of these people had a life time of accomplishments. But let's remember what was on everyone's mind in late January of this year. The United States had just had the most spectacular inauguration ever that was watched world wide.

Since Obama did nothing before becoming President to justify the Nobel Prize, his nominators likely thought much more about the most recent events than the life time achievements of people like Sima Samar, an Afghan doctor who repeatedly risked her life to provide basic medical service to poor Afghans or Piedad Córdoba, a Colombian lawyer who brokered the peace agreement between the Government of Colombia and the FARC guerrilla group which also lead to the guerrilla groups release of hostages.

Still, even if you attribute Obama's nomination for the award to recency error, this can not explain his selection. To understand this you have to consider the human thinking error of confirmation bias. The Nobel Committee cited "his extraordinary efforts to strengthen international diplomacy and cooperation between peoples." The Nobel committee members must have searched very hard to reasons to justify their prior decisions since Obama did not negotiate any major nuclear nonproliferation treaties or end any wars. His accomplishments in this area pale in comparison to past winners like Henry Kissinger and F. W. de Klerk.

Another thinking error the committee made was availability. This is the mistake of considering facts that are easy to recall and ignoring or dismissing facts that are difficult to recall. With billions of people on this planet there are tens of thousands of people who are doing truly important work to eliminate human suffering. Many of those people are toiling in relative obscurity and could use the notoriety and prize money to further humanity. Our minds naturally think about people in the news, but it is the responsibility of the committee to seek out those deserving souls that are trying to save their piece of the world and give them due consideration. The committee clearly failed to do this.

Selecting Obama demonstrates how disorganized the thinking of even very important organizations can be. Instead of relying on committee members to nominate people, the committee should adopt a much more comprehensive rules based approach which would allow people like Sima Samar and Piedad Coroba to get due consideration.

You've heard of the "KFC," right? Colonel Harland Sanders is known for having developed the best recipe for fried chicken. Ever.