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The Digest #60
Monday Morning Quarterbacks
Go for it!
There’s nothing easier than being a Monday morning quarterback. Armed with the advantage of knowing the results of an ill-fated decision, it is easy to be a critic and suggest that it was obvious that the wrong choice was made.
The reality is that there are many situations where a sound decision leads to a bad outcome as well as times when a poor decision leads to a good outcome. The role of luck and randomness comes into play when we look at the results of a single event so it is important to judge the soundness of the decision making process rather than just the outcome. Otherwise, we risk falling victim to hindsight bias.
Football provides endless opportunities to criticize the decisions of players and coaches. With just over two minutes remaining in the NFC Championship last Sunday, the Green Bay Packers trailed the Tampa Bay Buccaneers by eight points. On fourth down with the ball inside the ten yard line, head coach Matt LaFleur decided to kick an easy field goal worth three points rather than attempt to score a touchdown worth six points. Had Green Bay scored a touchdown, they could have attempted a two point conversion to tie the game. Instead, they had to turn over the ball to Tampa Bay still trailing by five points. Green Bay hoped a strong defensive showing would give them another opportunity to score, but that didn’t happen. Tampa Bay won the game.
We know that Green Bay lost the game but did the head coach make a bad decision?
Andrew Beaton considered that question in the Wall Street Journal’s coverage of the game. He points out that in the past, going for it on fourth down was more a demonstration of boldness and guts, or a sign of desperation. However, football has become increasingly analytical in recent years with coaches having access to enormous amounts of data that they can use in real-time to make decisions.
Certain statistical models cited in Beaton’s article suggest that Green Bay would have had a higher probability of winning the game if they had gone for a touchdown on fourth down rather than kicking the field goal. But the head coach pointed out that they not only would have had to convert the touchdown for six points but would have also had to execute the two point conversion. Given the failure of the offense to move the ball on the last few attempts, he considered the field goal to be the better bet, especially because Green Bay had three timeouts left and expected to get another chance to score.
When should humans override the optimal decision based on statistical models?
Jim Simons, who recently announced his retirement as Chairman of Renaissance Technologies, achieved tremendous success by inventing a “pure system” where his financial models were free to make decisions without humans interfering. Gregory Zuckerman’s book, The Man Who Solved the Market, describes how early attempts to develop automated systems at Renaissance were second-guessed by the humans who created the systems. There was always a temptation to fall back on intuition and instinct, even though doing so risked producing poorer results.
Whether we are talking about football, investing, or medicine, decision makers are often faced with the question of whether to fully trust statistical models, go with their gut, or try to come up with a hybrid approach. If you are making a large number of decisions where the consequence of each individual decision is relatively small, perhaps it makes sense to let automation decide — to implement a “pure system”. The trouble arises when you are making a single important decision with enormous stakes. Then it becomes very tempting to disregard the models and go with your gut.
One way or another, you can be sure that people will second guess what you do if things go sideways.
Amazon’s Logistics System
I have often been amazed by Amazon’s logistics network and the super-fast shipping that is available for many products. In many cases, products are available for overnight delivery in major metropolitan areas. However, as the video below describes, it is the two day Prime shipping promise that gives Amazon an advantage over FedEx and UPS. There have been rumors that Amazon will eventually compete directly with FedEx and UPS. I suspect that this will happen sooner rather than later.
Mohnish Pabrai’s Evolution as an Investor
MOI Global has made a recent interview of Mohnish Pabrai available to the public. Pabrai discusses how he has evolved as an investor over the past few decades and where his global hunt for long term investing opportunities has led him recently.
The Net of Good and Evil
John Steinbeck’s novel, East of Eden, is a tale that embodies the basic story of human existence, what Steinbeck called “a net of good and evil.” Interspersed within the novel, Steinbeck inserts philosophical mini-essays that clearly convey what he is trying to get across through his characters.
“Humans are caught — in their lives, in their thoughts, in their hungers and ambitions, in their avarice and cruelty, and in their kindness and generosity too — in a net of good and evil. I think this is the only story we have and that it occurs on all levels of feeling and intelligence. Virtue and vice were warp and woof of our first consciousness, and they will be the fabric of our last, and this despite any changes we may impose on field and river and mountain, on economy and manners. There is no other story. A man, after he has brushed off the dust and chips of his life, will have left only the hard, clean questions: Was it good or was it evil? Have I done well — or ill?”
Sky Meadows in Winter
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