Monday Morning Quarterbacking

Last year we had Michael Lombardi speak at the EBI conference about how his experience working with the likes of Bill Walsh, Al Davis and Bill Belichick in the NFL translates into the business world.¹

When I met Lombardi, who now works for The Athletic, he was at the whiteboard in the conference green room drawing up the play from Super Bowl XLIX. You know the play:
 

Lombardi, who worked for the Patriots at the time, drew up their defensive formation to show us why running it would have been the wrong call because of the way the Patriots stacked the box. Basically, the Seahawks had to throw the ball in one of their remaining downs even though every fan on earth assumed running Lynch was the right call.

I guess you could argue maybe they should have thrown the ball away from traffic but his argument made sense after the explanation.² The play was a result of a spectacular jump on the ball by Malcolm Butler, a genius defensive scheme from Bill Belichick, and a little bit of luck (good for the Patriots and bad for the Seahawks).

Lombardi talked about how the overreaction was driven mainly by the outcome bias. Had Seattle scored, Pete Carroll would have been heralded as a genius. Instead, he was the goat.

Annie Duke wrote about this one in the first chapter of her excellent book, Thinking in Bets. She called this idea resulting:

Pete Carroll was a victim of our tendency to equate the quality of a decision with the quality of its outcome. Poker players have a word for this: “resulting.” When I started playing poker, more experienced players warned me about the dangers of resulting, cautioning me to resist the temptation to change my strategy just because a few hands didn’t turn out well in the short run.

Pete Carroll understood that his universe of critics was guilty of resulting. Four days after the Super Bowl, he appeared on the Today show and acknowledged, “It was the worst result of a call ever,” adding, “The call would have been a great one if we catch it. It would have been just fine, and nobody would have thought twice about it.”

When we work backward from results to figure out why those things happened, we are susceptible to a variety of cognitive traps, like assuming causation when there is only a correlation, or cherry-picking data to confirm the narrative we prefer. We will pound a lot of square pegs into round holes to maintain the illusion of a tight relationship between our outcomes and our decisions.

Michael and I spoke about this on the podcast this week:
 

Your win-loss record in the markets often takes time to germinate. You can be right for the wrong reasons or wrong for the right reasons, making it difficult to understand when you’re making a mistake and when you’re just plain lucky (or unlucky).

Market success can also be swayed heavily by the environment investors are forced to deal with. The last 20 years or so have been as challenging as any two-decade stretch in modern market history, which helps explain why there’s a dearth of star fund managers these days.

It’s easy to preach process over outcomes but our brains will almost always default to outcomes over process.

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Here’s the full highlight reel from this week’s podcast:
 

Now here’s what I’ve been reading lately:

• Immune to your consultations (Reformed Broker)
• The next recession (Irrelevant Investor)
• Money is a mind virus (Monevator)
• 28 ways to manage stillness in your life (Four Hour Blog)
• 3 criteria to use when making money decisions (Bone Fide Wealth)
• Investing for the elite (Big Picture)
• The renegade executives of Houston who shook up sports management (WSJ)
• The relationship between your waistline and lifespan (Eight Fat Swine)

¹Lombardi has a great book with tons of good NFL stories called Gridiron Genius that’s worth a read.

²My podcast co-host Michael Batnick was in the room with me at the time. His response was, “Yeah…but they had Marshawn Lynch.”