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Who's in the Video
Michael Mauboussin is the chief investment strategist at Legg Mason Capital Management. Before joining LMCM in 2004, he was a managing director and chief U.S. investment strategist at Credit Suisse.[…]

When it comes to investing advice, media pundits tend to amplify both optimism and pessimism.

Question: How does the media influence investment decisions? 

Michael Mauboussin: The media tends to be an amplifier, not surprisingly, and so when the collective tends to be tending toward optimism or pessimism, the media often will fan the flames of that. There have been studies of this, for instance, studying magazine covers from famous business magazines, some BusinessWeek, Forbes and Fortune and such. What these academics did is study cover stories and basically when the cover was really bullish and a company had done really well, not surprisingly because reversion to the mean, they tended to do much more poorly in subsequent periods. Likewise, if they had a negative cover story, you know, this company’s in the doghouse and they've done very poorly, they tend to do much better subsequently. So I think that’s one very big important instance of this. 

The second thing I’ll mention on this which is really fascinating emanates from the world study on experts and we all love to know what’s going to happen in the future. We just want someone to say "Markets are going to go up," or "Markets are going to go down," or "Here’s your future." We all pine for this. But what we know is experts in certain domains, and I would specifically mention economic and political domains, are notoriously poor forecasters. 

The best work on this is done by Phil Tetlock who is a psychologist at Cal-Berkley, and he wrote an absolutely wonderful book called "Expert Political Judgment" where he actually got hundreds of experts to make tens of thousands of specific predictions over a long period of item, and then he actually kept track and it turns out these experts really were poor, poor predictors. In fact, extrapolation algorithms did, in many cases, close to as well. 

Tetlock, though, did find two things that were statistically significant. The first is the more media mentions a pundit had, the worse his or her predictions. So this goes back to your point on the media. Turns out the talking heads on TV are among the worse predictors of our experts. So even though we love seeing them and we love to defer to their judgments, we know that they are not very good at what they do. 

The second thing he found is that it didn’t matter so much what your age was or gender or political persuasion, what mattered was how you thought about the world and he demarcated the world into what he called hedgehogs—"I know one big thing and the world view fits into that"—and foxes, these are the people that know a little bit about a lot of different things and what he found quite consistently were that foxes were better predictors than hedgehogs. 

Now the hedgehogs always had their 15 minutes of fame when their predictions came true, but navigating over time, the foxes tended to do better.

Recorded on May 14, 2010
Interviewed by Jessica Liebman