I defined stupidity as overlooking or dismissing conspicuously crucial information. – Adam Robinson
That definition seems obvious, but there has been deeper research studying how to define stupidity. Of course, this research was published in an academic journal called, Intelligence.
Nonetheless, it seems that one of the key ways to generate success in investment management is to just not do stupid things. Cut the stupidity and you will be more likely be a success. Unfortunately that is easier said than done. Stupidity is all around us. We are not just talking about behavior biases but rather the issue associated with a lack of good sense or judgment. Of course, behavioral biases and stupidity do intersect. The attempt to employ mental shortcuts will lead to stupidity.
Three behavior linked with stupidity from research work include:
- Confidence ignorance – taking high risks without the skills to be successful;
- Absent mindedness – the lack of practicality. Not being able to properly execute simple tasks;
- Lack of control – allowing compulsive behavior to interfere or override important tasks.
Stupidity is not a problem for individuals. There is a spillover effect to others. The economist Carlo M. Cipolla defined some laws of stupidity:
- Law 1: Always and inevitably everyone underestimates the number of stupid individuals in circulation. We may underestimate the number of stupid investors in financial markets.
- Law 2: The probability that a certain person be stupid is independent of any other characteristic of that person. Any one group has not cornered the markets for stupidity
- Law 3. A stupid person is a person who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses. There is no intent to be stupid. It happens and hurts others.
- Law 4: Non-stupid people always underestimate the damaging power of stupid individuals. In particular non-stupid people constantly forget that at all times and places and under any circumstances to deal and/or associate with stupid people always turns out to be a costly mistake.
- Law 5: A stupid person is the most dangerous type of person. A corollary: a stupid person is more dangerous than a bandit. You cannot form laws against stupidity.
The importance of rules with asset management is very simple. Systematic action helps enforce good behavior on your actions. The use of discipline will help ensure President Obama’s rule, “Don’t do stupid stuff”.