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This common mistake poses a ‘huge problem’ for investing decisions: Annie Duke

·3 min read

This year brought a devastating pandemic and an acrimonious election, but also an unlikely stock market rally. Now Wall Street wonders whether the surge will continue deep into 2021.

In a new interview, behavioral scientist and former poker champion Annie Duke warned of a common mistake that poses a “huge problem” for investors fresh off an ecstatic victory or a crushing defeat: drawing on short-term results for long-term strategy. Investors shouldn’t evaluate decisions solely based on their outcomes, Duke warned, noting the role played by chance and luck.

“Obviously, whether you won or lost on one iteration, if you think about it, it doesn't actually tell you very much about the quality of the decision,” says Duke, the author of a new book, “How to Decide: Simple Tools for Making Better Choices.”

“But we do this all the time,” she adds. “You can see this in finance, for example just in terms of capital allocation — that people will re-up with managers who have won in the last year and they will not allocate to managers who have lost.”

“We know that that's actually a losing strategy — that you do worse that way because of regression to the mean, and you're not taking luck into account,” she says. “It's a real mistake that we make, and it's a weakness of human decision making.”

Since the outset of 2020, the S&P 500 has soared more than 13% and the Dow Industrial Average has risen nearly 5% — even as tens of millions remain unemployed and on the brink of eviction as the economic recovery slows. But consensus about the stock market outlook for 2021 and beyond remains elusive among strategists.

Meanwhile, new accounts spiked earlier this year at online brokers like Charles Schwab and Robinhood, suggesting a flood of investors trading for the first time.

The advice from Duke aligns with the patient approach to investing that many associate with Berkshire Hathaway CEO Warren Buffett, who last year summed it up in a conversation with Yahoo Finance Editor-in-Chief Andy Serwer.

“All you have to do is just buy a cross-section of America and then never listen to people like me or read the papers or do anything subsequently,” Buffett says.

NEW YORK, NY - [May 10, 2009 ]: Annie Duke on the set of The Celebrity Apprentice live final episode on May 10, 2009 in New York City. (Photo by Bill Tompkins/Getty Images)
NEW YORK, NY - [May 10, 2009 ]: Annie Duke on the set of The Celebrity Apprentice live final episode on May 10, 2009 in New York City. (Photo by Bill Tompkins/Getty Images)

Duke spoke to Yahoo Finance Editor-in-Chief Andy Serwer in an episode of “Influencers with Andy Serwer,” a weekly interview series with leaders in business, politics, and entertainment.

She said the fallacy of over-interpreting results extends beyond finance to the realms of sports and politics, citing critics who reacted to the loss of Democratic nominee Hillary Clinton in the 2016 election by criticizing her choice to forego sufficient visits to key upper midwestern states.

“We need to think about what is the information that she had at the time of the decision,” Duke says. “So, could she have known that she should have been in those states? Well, the input into that decision is going to be the polls, and we found out after the fact that there was quite a large polling error, that that polling error happened to go in Donald Trump's favor.”

Criticism of Clinton over the lack of visits to the upper midwest were made after the election but not beforehand, Duke noted.

“This is a really good case of resulting,” Duke adds. “She lost there for decision making that must have been bad, as opposed to she lost because there was a problem with the polls that nobody could have known about, except for after the fact.”

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