Broken Clocks

September 26, 2012  |  Finance, Other, Politics, Sports, Uncategorized

In our last post, we highlighted our preference for “second acts”, which we defined as repeated success in different environments. We focused on repeated success in that discussion. Here, we will delve into the second component of the definition: different environments.

As with broken clocks, which are right twice each day, many pundits make the same prediction over and over, knowing that they will be intermittently correct. The stock market offers an ideal breeding ground for this type of pundit, given its long cycles and binary outcomes (the market is either up or down). Those who are always optimistic on the stock market (known as “perma-bulls”) are right during bull markets, while those who are always downbeat (“perma-bears”) are right during bear markets. Both groups are anointed as gurus when the environment happens to be in their favor, but they are dead wrong during the other cycle. The behavioral elements discussed in our One-Hit Wonders post are again at play: recent, vivid, and unusual information are front-loaded in our brains. But another bias comes into play here: the “fundamental attribution error.”

The fundamental attribution error refers to the idea that when explaining successes and failures, we tend to overweight the role of the individual and underweight the roles of chance and context. For instance, in the early 2000s, much ink was spilled in lauding Terry Semel and Meg Whitman (then CEOs of Yahoo and eBay, respectively) as superstar executives. The alternative explanation — that these CEOs were running companies that happened to be at the right place at the right time — never received much thought. That’s not surprising, given that cause-and-effect, character-driven narratives are inherently much more appealing than chalking things up to good fortune.

Similarly, rather than considering that some pundits offer a static viewpoint which happens to coincide with an existing cycle, we elevate them to oracle status. We hope PunditTracker will help distinguish those pundits with the mental flexibility to provide insight in different environments from the broken clock crowd.

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  1. Broken Clocks | PunditTracker – just great!

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