Experience or Expertise?

In the first episode of his new podcast, The Knowledge Project, Farnam Street’s Shane Parrish interviews Michael Mauboussin about a wide range of topics centered around the decision-making process. Mauboussin had some interesting things to say about the difference between experience and expertise:

There is a great quote from Greg Northcraft, which I love, when he says you have to differentiate between experience and expertise. Intuition relates to this.

He said expertise… An expert is someone who has a predictive model that works, and so just because you’ve been doing something for a long time doesn’t mean that you have a predictive model that works.

I hear from young people in the finance industry on a regular basis who are forced to deal with a lack of experience when trying to get their ideas across to clients or their superiors. You have to pay your dues and be patient in any field, but there are also many bright and capable young people that are often overlooked simply because of their age. It feels safer for clients or co-workers to defer to the gray hairs who have been around for much longer.

A number of years ago I attended a conference with GMO’s Jeremy Grantham as the keynote speaker. During his speech Grantham pulled no punches and basically told the packed house full of professional investors that, “you’re all doing this wrong.” He said the majority of the people in the room tried to make portfolio and risk management far too complex and don’t spend enough time focusing on the things that really matter. He stated that most of the organizations these people were investing on behalf of would be worse off because of this. The reception from the crowd was less than enthusiastic, to say the least.

Following his speech there was a break for snacks (professional investors are like kids at a youth soccer game during conferences — we need a snack break) and I noticed no one was talking to Grantham as he waited in line for a cookie. I have a feeling this had something to do with the lukewarm reception his speech received. So I approached, introduced myself and asked, “What could a younger person such as myself do to create change within an investment organization?”

He was very kind and offered me a very quick outline of his views on not only portfolio management, but also how to run a successful investment firm (GMO, the firm he founded, manages over $100 billion so he has plenty of clout on the subject). His parting words before being whisked away by his handlers have stuck with me ever since.

To paraphrase, he said, “To create change in a financial firm as a young person you must back up all of your opinions with thoroughly researched evidence and data. And even then most of the higher-ups won’t listen to you. In that case, do what I did and start your own firm or try to find like-minded peers to work with because most people in this industry will never change their minds because of ignorance or career risk.”

This pep talk was both inspiring and depressing at the same time.

I do think that there are certain things, especially in the financial markets, that can only be learned through time and experience. Some things simply cannot be gleaned from a textbook and most go through a process of trial and error before settling on a workable philosophy. But a focus on experience can be taken too far. Investment organizations often tout the combined years of experience for their employees. Our firm has a combined 128 years of experience in the investment business. 

My problem with this line of thinking is that I’ve seen people who have been in this industry for decades, yet continue to make the same mistakes over and over again because of career risk or an inability (or reason) to change. There are also many people and organizations who claim to be experts, but really have no idea what they’re talking about. Most financial “experts” are really just very adept at selling themselves or their narrative to an unsuspecting audience.

From my experience and talking with peers in the industry, not nearly enough financial organizations spend time cultivating or training their younger employees. I get plenty of questions and comments from young people in finance who say they’re having a hard time breaking through because clients or management look at them differently because they’re young, even if they’re able to provide a different point of view or level or service.

Obviously, it’s always nice when you can find with someone with both experience and expertise. But I think there is a boatload of young talent out there that’s being overlooked or under-utilized in the world of finance. I personally know some of the brightest minds in the financial community who are on the younger side, but they’re also hungry, intelligent and entrepreneurial with an enormous amount of integrity to boot. Many of my peers have decided to go out on their own and start their own businesses because they were being overlooked or working for the wrong organization.

I think financial firms would be wise to pay attention to the younger generation. As technology and forms of communication continue to evolve this group is going to be a huge asset to those who understand how to get the most out of them. Expertise in certain areas doesn’t always require decades of experience.

Listen to The Knowledge Project podcast:
Michael Mauboussin on Intuition, Experts, Technology and Making Better Decisions (Farnam Street)

Further Reading:
Do You Feel Lucky?
My Letter to Young Analysts

Here’s the stuff I’ve been reading lately:

  • The circus of what’s working now (Reformed Broker)
  • 6 takeaways from Todd Wenning’s first trip to the Berkshire Hathaway annual meeting (Clear Eyes Investing) and see also 10 quotes on Warren Buffett I keep coming back to (William Green)
  • What Dean Smith taught Jerry Stackhouse about money (Yahoo Finance)
  • A brief history of 401ks (Morningstar)
  • On cognitive biases and The Masters (Mullooly)
  • Why setting the correct expectations is important no matter how you build your portfolio (Bason)
  • Rebrand stage fright as excitement to overcome it (Scientific American)
  • Advice for newly graduated college students (Motley Fool)
  • “Why is this important, and why should I spend my time on this?” (om.com)

 

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  1. MarketFox commented on May 08

    Great post Ben,

    Investments is a tough industry for the young, bright and idealistic.

    One thing that has helped me is to write my own premeditatio malourm (http://philosophy-of-cbt.com/2012/10/26/a-crash-course-in-stoicism/).

    The idea is to start each day thinking about the worst, then whatever happens you won’t be unpleasantly surprised. Here’s what I’ve written.

    The wise investor will start each day with these thoughts:
    Investment success depends on what happens in the future.
    The future is both uncertain and unknowable.
    Nothing is stable.
    Many investors are fundamentally incapable of understanding these facts.
    They are temperamentally unsuited to managing risk.
    They are ignorant of history, have no appreciation of risk and hold unrealistic expectations about the future.
    They will seek certainty in the opinions of experts and comfort in being part of the crowd.
    Luck is often mistaken for skill.
    Age and tenure are frequently mistaken for wisdom and experience.
    Complexity is considered a virtue, while simplicity is ridiculed.
    Short-sighted decisions are made to reduce psychological pain and often at the expense of long-term profits.
    You will be judged by your results (with the benefit of perfect hindsight) and not the quality of your decisions.
    You will be misunderstood.
    At times you will feel frustrated.
    You will often be prevented by bureaucracy from doing what you believe to be right.

    But remember that this is evidence that markets are not efficient.
    Irrational behaviour means that there are always opportunities.

    • Ben commented on May 08

      Good one. I like it. Thanks for sharing.

  2. ST commented on May 08

    “In field after field, when it comes to centrally important skills—stockbrokers recommending stocks, parole officers predicting recidivism, college admissions officials judging applicants—people with lots of experience were no better at their jobs than those with less experience.” ~ Geoff Colvin, Talent is Overrated

    I used to race road bicycles and often heard that neophyte cyclist almost always had a better position on the bicycle than the seasoned pros, in other words the young racers were more EFFICIENT (expending less energy, etc.) than those who had slipped into doing what felt comfortable. However, it was almost always the older racers who won races, meaning their experience (how to read a race, etc.), made them more EFFECTIVE. It becomes a matter of turning that efficiency into effectiveness. Just an observation.

    It’s a weird, biased-run world out there, for sure. Even more frustrating for someone like me, who is not twentysomething but just as new to the finance sector. Can I be trusted because I’m not young or brushed off because I lack decades of experience? I not only have to overcome my own biases but also overcome the biases of clients, that’s a full-time job in itself!

    @MarketFox: “idealistic” is probably what makes the finance sector tough for anyone of any age, but those who are new to the industry are probably also saddled with a degree of naivety, which compounds the pain.

    • Ben commented on May 08

      Good points all around. Looks like an interesting book to check out as well. My experience has been that honesty and transparency are really great ways to set yourself apart, no matter your age or experience.

  3. Scott Boone commented on May 08

    As a manager, I often faced resistance when trying to promote a younger, less experienced employee. We had rules that dictated how long someone needed to be a position before being considered for a higher position, none of which had anything to do with their actual ability. Training was another sore point. It was always touted in good times, but tended to quickly disappear when times got tough and, arguably, it was needed most. Everyone moaned (or pointed fingers!) when we lost someone good, but there was seldom any real analysis of what could have been done differently to hang on to this talent longer.

    • Ben commented on May 08

      Interesting. I’m sure your experience isn’t unique in that aspect. I think a training program could help, but I’m also a fan of a rotating mentorship program to open those lines of communication up between the higher-ups and the younger employees.

      • Scott Boone commented on May 08

        I totally agree, but these kinds of programs have largely ceased to exist in most corporate environments. When I started working 40+ years ago, such programs were more common. With today’s pressure on FTE, there are few “extra” positions available with which to accomplish this sort of training. I also suspect that the erosion of long term tenure with one company has also undermined this sort of employee investment.

  4. jz commented on May 08

    Ben, I’ll extrapolate from the field of medicine. Young minds trap the details, have better memories and modeling skills. Old minds are superior in emotional stability; they can temper the emotional lability of the younguns.

    • Ben commented on May 08

      Well said. Being able to control your emotions is definitely one of the areas that people in the world of finance have trouble with especially at a young age. You can simulate something like the 2007-09 crash and explain how it makes you feel when markets are getting crushed.

  5. ST commented on May 09

    There is a downside to experience: the knowledge to do wrong — deliberately. Investigate any financial scandal/crime and the person(s) behind it are almost never “on the younger side”.

    • Ben commented on May 10

      That’s very true. Much easier to deceive when you’ve been in the game for a long time. I never thought about it that way but you’re right…very few (any?) scams from younger people. Speaks to my point of most people trusting the older, more experienced crowd.