Finding symmetries in an unsymmetrical world ..

Posts Tagged ‘decision making

Survivorship bias is the logical error of concentrating on the people or things that “survived” some process and ignoring those that didn’t.In other words , focusing on the victories to mask the wrong that has been done .

That is to say masking the results of poor performing assets/instruments to cosmetically improve the appearance of the lot .That being said,it happens all the while withe the Mutual funds and other Financial Instruments , or with the Top performers of every college being idolized and revered with the Marketing Clinches.

With top performers , any college masks out the droppers, mediocre students who did not get a job  (worser still got a non- value add job – say selling burgers – or documenting- figures don’t account this “averaged” cases )  – Which is to say that Averages is always misleading .What we need to look at is Random numbers , probability of the distribution of the top performers in each of the specialization ,and consequently mapping this with your abilities -and finding out your chances of survival !

Also , finding out the standard deviation from the mean gives a fair estimate of the deviation to be expected , or that which is both normal and acceptable .

Now let us see what that means in game theory,and how could we detect the same ?  Let see this with an example of Money Markets (simply because the payoffs and the utility function are better understood in this context -and there is a measurable set of parameters to evaluate this “bias “ on .)

The rule of thumb in Game Theory ascertains to know the strategy of the other player-and hence predict what would be in his self interest to make the move .

That in an Asset Management organization could mean – to better reflect and sell other “far better performing ” funds  –

a. To close the funds that have higher risk and comparatively low returns .

b. To Mask the data by first implementing (a) ,and then taking an average of the subset of the better-off funds -and declare the weighted Performance average to be far better than it is .

Now let us see the risks – i.e what this means to an individual investor

There are two cases here –

a. That this investor invested in the “bad” funds .

b. That this investor invested in the subset of funds minus the bad funds (i.e the better off funds) – so no impact

* potential impact discussed in point (c)

c. That this is a new investor seeking to distribute his portfolio across the different funds of the AMC .

In case b and c , the misleading data hurts because – it gives an overall impression and hence the incentive for further/future investment ,which harms the investor by increasing the risk,and lowering the returns .

The safeguard – To find what the average actually means – is it a weighted average of all the funds of the AMC , how long have the funds being running since inception, the debt/ equity exposure and hence the risk vs the returns , the brand image of the AMC , the returns quoted against per year performance or averaged over three/five /other periods – mostly the firms “use” 1 year retuns- simply because they look lucrative and better instruments .

Also , these are the things to look at –

What were the market conditions that the performance intends to capture – bull, bearish , averaged markets .

Is the firm comparing apples with apples – Is the comparison between different funds of different AMC ‘s taking the market conditions into account . Is it evaluating it against the same averaged overall period ?

Are the figures exaggerated -what else is potentially beautifying it ? Is the mathematics correct ?

~

ek

You don’t need newer landscapes to make new discoveries – just a pair of new eyes  – Raffael  Lomas

Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision. Opportunity cost analysis is an important part of a company’s decision-making processes but is not treated as an actual cost in any financial statement. The next best thing that a person can engage in is referred to as the opportunity cost of doing the best thing and ignoring the next best thing to be done .

 

 The sad part is that there is an opportunity cost attached to everything, so whatever you do  you will always be tormented by that  feeling of “losing out on something”.

 

In college, the opportunity cost of slogging it out meant losing out the fun, and social networking .In workplace, choosing a particular work profile meant losing out on exploring other avenues.

 

So, if there is a COST that is involved to everything, you might as well do things right. Bottom line: there is nothing free out here, if it is, find who is paying for it.

Now the tricky part: The decision making

 

Define what you want :

 

The more specific you are on what excites you, and what is it that you WANT, the more likely you are to achieve it.

 

 

Analyze why you want and evaluate the alternatives:

Analyzing why you want one thing over another, is as important, because this lets you achieve the tradeoffs in the options abundant world. The more the options open to you, the more should analyze why you chose one thing over another.

 

Some reasons be may inherently justified, like leaving a job to pursue higher education. Here’s a good example that I came across :

 

Consider the case of a MBA student who pays $30000 in tuition and fees at a private university. For the two year program this would amount to $60000.This is the monetary cost of education. However when making the decision to go back to the school, one should consider the opportunity cost, which includes the amount that the student would have earned had he chose the decision of remaining in his/her job. If the student had been earning $50000 per year and assuming a 10% increase in salary in the second year, $105000 in salary would have foregone as a result of decision to return to the school. Adding this amount to the tuition fees results in $165000 for the degree.

 

 

Just do it :

 

Simple as it may sound, you are anyway paying for every single decision that you make, you are giving it your time, which by far is the most precious resource that you alone have.

 

If something is worth doing, it is not worth doing it bad .


~

ek

The question isn’t who is going to let me; it’s who is going to stop me.


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