When weary of posing as an online persuasion expert, I sometimes masquerade as an investment guru for those working beyond good and evil. The fit is superb when you think about it; I’m only changing the mask while doing the same thing! And, as I’ve compulsively noted, for passive investing the science says, Save, then, Invest in Index Funds. Of course, I’m just a ponce in his underwear at the computer. What about guys who wear suits and appear in public. Like him.
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The Oracle of Omaha himself, Warren Buffett, has a bet a million dollars (going to a charity) that the Investing Science recommended on the Persuasion Blog will beat the persuasion panthers at Hedge Funds Engulf and Devour LLC. Buffett picked John Bogle’s Vanguard 500 Index Admiral Shares for the actual index fund. His betting opponents did what?
The other side of the bet is a collection of five hedge funds of funds chosen by New York-based Protégé Partners.
To date the identity of the five hedge funds remains unknown and with good reason. Six years into the ten year bet, Buffett through Bogle at Vanguard is up nearly 44% while the five hedge funds are up 13%. For those who do their math like E.O. Wilson, let’s call in a mechanic with an abacus.
Do a Tooth Fairy Ratio. Hmmm. Take 44 then divide it by 13 and you get 3.38. That’s a Medium+ Windowpane we just opened. A difference you can see without putting on your glasses. A difference you can see without a Stat Boy. A difference between, “I’ll handle this,” and “Run for your lives!”
Note, however, that this is only 6 years into a 10 year bet, but I’d bet if Buffett offered Protégé Partners a chance to double down on the remaining 4 years, they would insist on sticking to the original agreement. Realize this bet began in January 2008 when stock markets had lost 50% of their value and the world was in financial crisis. Given that Local, who would you pick: a bunch of smart Cool Table guys using science to hedge or a math formula that draws a representative random sample of the 500 largest US companies?
As we’ve observed before, for all the numbers in investing and finance, most Other Guys don’t fall for the cognitive Cues (that System 1 from the Nobel prize winning Fast and Slow Model – you realize those guys got the Nobel, okay not the real Nobel, an original Nobel, but the economics Nobel in the style of the original Nobel, but still the word, “Nobel,” is in there.) No numbers, please, even when doing the numbers!
Instead Other Guys warily glide along the Peripheral Route with social Cues and invest their money based upon Uncle Norm and Auntie Comparison and Super Model with a fair amount of Dr. Doctor, PhD and Ms. Liking to close the deal. And, people wonder why a billion tin cans on strings is currently worth more than a $100 billion market capitalization; just say everyone is doing Facebook! No one has to count anything or suffer through any of those cognitive heuristic tricks (“a bat and a ball together cost $1.10 . . .) beloved of Nobel prize winning persuasion theory, oops, Behavioral Economics.
If you know the science then you know this bet ended after Buffett and Protégé Partners shook hands. We’re just waiting for all of the dead body to hit the ground. But wait we will. I’m sure we’ll hear about the conclusion of this bet.
So what do idiots like the guy running the Persuasion Blog and Primer or Warren Buffett know about the science of passive investing?
P.S. Persuasion Bonus with Cognitive Heuristics! Part of the trick with the cognitive heuristics from System 1 is the fiendish, one might say, persuasive selection of “math” problems employed to operationalize the heuristic. Take that infamous bat and ball problem that most people get wrong.
A bat and ball together cost $1.10. The bat costs a dollar more than the ball. How much does the ball cost?
If you are buzzing through a standard social psych, dammit, I did it again, Behavioral Economics, survey, you tend to hit the Peripheral Route pretty quickly and just skim along providing the minimum WATTage needed to complete the task and get your money or course credit. Low WATTers read this bat, ball, $1.10 set up and immediately reply: 10 cents! Then onto the next problem in what is just a long series of questions and tasks in the Local called the Research Lab.
Of course, 10 cents is wrong. Wrong! How is that wrong? Klong! Oh, wait. Together the bat and ball cost $1.10 and the bat is a $1.00, so if the ball is 10 cents then the bat is no longer $1.00 more.
The persuasion fiend in this story is one word, “more.” It hides an extremely complex math solution to what seems to be a simple math calculation. Here’s the sequence of math you need to complete for this problem.
ball + bat = 1.10
bat = ball + 1.00
ball + (ball + 1.00) = 1.10
ball + ball + 1.00 = 1.10
2 ball = 1.10 – 1.00
2 ball = 0.10
ball= 0.10/2
ball cost = 0.05bat = ball + 1
bat = 0.05 + 1
bat cost = 1.05
This compliments of Jorge from Mexico. (You Brooks’ed over the math, didn’t you?)
You have to solve a series of easy equations in this algebra, but you’ve got to take a lot of steps, get the math right each time, and move on. This is persuasively hidden in the phrasing of the problem, especially with that one word, “more.” You don’t see all this complexity in the phrasing of the problem and default to the obvious, simple, and incorrect math of 1.10 – 1.00 = .10.
If you presented the word problem in a way that made the algebra obvious, you’d probably get even more incorrect answers because no one participating in a research study like this is going to waste all that time when the point of the activity is to get the money or the credit. Jeepers, just make a quick guess like this . . .
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. . . finish the damn Behavioral Economics task, get your money, and move on to that Blonde waiting at the end of the bar or the Rec Center or Student Union or wherever your Blonde awaits.
P.P.S. No. I’m not saying Fast and Slow is wrong or even unworthy of a Nobel. In fact, that’s the scientifically correct achievement for it.