Counteracting Consequences from Chasing the Big Score

How can investors counteract the negative ramifications of being wired to chase the big score? Never make snap investment decisions, instead putting all potential investment ideas through a similar process checklist. Be wary of “story” stocks and of situations that are reminiscent of previous big investment successes, both of which can lead to costly analytical shortcuts. Focus on being an “empirical skeptic” – rather than accepting that earnings can grow 30% annually for ten years or a given level of return on capital can persist, look at the distribution of outcomes from a large historical sample to see how reasonable such estimates are. Finally, spend as much time defining what the downside can be as the upside, and look to make highly asymmetrical bets.