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The Need for Multidisciplinary Education

September 04, 2012 | About:
The Science of Hitting

The Science of Hitting

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In the mid-1980s, The Coca-Cola Company (KO) made what has gone down in business history as one of the biggest mistakes of all time; here’s how that decision was described by former President of The Coca-Cola Company and current Berkshire Hathaway (BRK.B) board member Don Keough:

“I’ve become very wary of all studies related to marketing and business management. They have their place, but I’m convinced that we are often measuring the wrong variables and the wrong people are evaluating the measurements.

The classic example for The Coca-Cola Company was the infamous introduction of New Coke in 1985. In blind taste tests that involved little sips of product A versus product B, the sweeter product won. This led us to the erroneous conclusion that Coca-Cola was not sweet enough.

But blind taste tests completely fail to portray the full dimensionality of the product Coca-Cola – its total image and cultural context.”

In a speech entitled “Practical Thought about Practical Thought?” Charlie Munger addressed this event, saying the following:

“The brilliant and effective executives who, surrounded by business school and law school graduates, have run the Coca-Cola Company with glorious success in recent years, also did not understand elementary psychology well enough to predict and avoid the “New Coke” fiasco, which dangerously threatened their company. That people so talented, surrounded by professional advisers from the best universities, should thus demonstrate a huge gap in their education is also not a satisfactory state of affairs…

Academia, by and large, continues in its balkanized way to tolerate psychology professors who mis-teach psychology, non-psychology professors who fail to consider psychological effects obviously crucial in their subject matter, and professional schools that carefully preserve psychological ignorance coming in with each entering class and are proud of their inadequacies.”

I point to this information because finance is largely suffering from this failure to consider such obviously crucial subject matter. One of the better know examples is Value at Risk, or VAR, models; here’s what David Einhorn had to say about VAR during an interview with the Financial Crisis Inquiry Commission:

“The other major thing with the investment banks that you didn’t allude to is the use of the value-at-risk models which made no sense from my judgment because they cut off the tail. And the whole point in my view with risk management is to prepare yourself for what happened in tail events [as he’s said in the past, that’s the equivalent of having air bags that always work unless you get into an accident]. And second, because the people who are running the banks or who were involved with the banks, understood that the risks in the tails were being cutoff, they effectively were able to game the system by buying securities that in the model showed no tail risk and therefore required no capital or almost no capital.”

Another area where this is apparent is the efficient market hypothesis (EMH), which is a cornerstone of academic financial theory; in its strongest form, EMH suggests that even insiders, with hidden information, would not be able to consistently achieve risk-adjusted returns in excess of the market. The assumptions required for this to hold are truly laughable; on the other hand, the fact that academia still uses EMH as a crutch (for example, beta as a measure of risk) for financial education at our nation’s top universities is a disgrace and a disservice to those looking to enter the field (as a relatively recent college grad, I can attest first hand that this is still the order of the day).

This article doesn’t really have a point: It’s simply a call to those interested to address deficiencies that may exist in your current financial education. As directed by Mr. Munger, I believe two critical areas of focus are behavioral finance (which I’ve researched extensively and will write about more in the future) and multidisciplinary learning (something I’m personally lacking in a big way); over time, I’ll attempt to learn more in these areas and write articles that may (hopefully) help us all to collectively move closer to a better understanding of that which is needed to be a successful investor and businessman/businesswoman.

If any readers have a suggested starting point on this trek, I would love to hear your thoughts.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.2/5 (16 votes)

Comments

jayb718
Jayb718 premium member - 1 year ago
I love Peter Bevelin's book Seeking Wisdom: From Darwin to Munger. It's a great starting point.

Poor Charlies Almanack is fantastic also.
The Science of Hitting
The Science of Hitting premium member - 1 year ago
Jayb718,

"Seeking Wisdom" has just jumped to the front of my reading list; thanks for the comment!
jayb718
Jayb718 premium member - 1 year ago
You're very welcome. You'll enjoy it. It's really enlightening.
paulwitt
Paulwitt - 1 year ago
I have the book "Investing:The Last Liberal Art" written by Robert Hagstrom, copyright 2000. It's an interesting read but someone will have to take into account numerous "positive" references to a top mutual fund manager (who didn't do very well in the great recession)

paulwitt
Paulwitt - 1 year ago
I just went to Amazon.com and saw that Mr. Hagstrom is coming out with a second edition of "Investing: The Last Liberal Art" due out Jan '2013. The write-up says it is going to be updated to include the 2008 economic upheaval. I'll most likely buy it when it comes out.

jayb718
Jayb718 premium member - 1 year ago
Thanks Paulwitt. I enjoyed Mr. Hagstrom's book. I'll likely purchase it.
varunfriend
Varunfriend premium member - 1 year ago


I am currently reading "Poor Charile's Almanac" .. Wisdom in Munger's own words - all in one place.
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
I figure that people attracted to the harder sciences as well as finance, accounting, etc. have found success in task orientated process and procedure heavy course material. Predictable work with predictable outcomes. They were not attracted to history, art, literature, writing, sociology and the like course material. The many accountants, engineers and the like that I've encountered have seen little need for such airy-fairy course work. Their very behavior is an interesting emotional, psychological state.

Also, Jeremy Grantham said this:

"I ask myself, ‘Why is it that several dozen people saw this crisis coming for years?’ I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even [U.S. Treasury Secretary] Hank Paulson and [Fed Chairman Ben] Bernanke — none of them seemed to see it coming.I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained — but we end up with an army of left-brained immediate doers.

So it’s more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored. . . .

So we kept putting organization people — people who can influence and persuade and cajole — into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don’t have those skills.”[ 6]. "GMO Quarterly Letter Fall 2008 Part I
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Steve Jobs is also a good example of how eclectic interests can come together to yield visions that the establishment is seemingly blind to.
boutch2fr
Boutch2fr - 1 year ago
Hi,

regarding "multidisciplinary learning", Munger recommended in a lecture the "Influence" psychology classic from R.Cialdini.

I haven't read that one, but found another Cialdini & co book called "yes! 50 way to influence..." I think. Great insights into the way brains function.

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