On the Role of Luck and Extra Cookies, YTD Equity Performance, Policy Actions

To take a  break  from covering  writings on  financial  markets, this week we turn to the key role  that luck plays  in our lives.  Michael Lewis, the well  known writer and commentator on financial markets, made a short speech to the 2012 graduating class at  his alma mater Princeton University, on how we constantly underestimate the role of luck in our success.

To summarise:

-Lewis maps out how he joined Salomon Brothers in the mid-eighties purely by chance ,  and how  that experience sowed the seeds for his literary ambitions,  commencing with the publishing of his best-selling book Liar's Poker which sold a million copies, making him a successful author at the age of 28.

-While the world eulogised his writing skills,  Lewis  knew  that  what was more critical to his success was a series of  chance events,  illustrating  that "success is always rationalised" and that  people typically don't like to hear that success is  due to luck – especially successful people.

-In his book "Moneyball"   he showed that  the poorest professional baseball team (Oakland A's) was winning as many game as its richest team – the Yankees. This is because the rich teams did not understand who were the best players, and were routinely misvaluing them because they were not taking into account the role of luck in baseball success.

-The message from the "Moneyball"  story  were at two levels –  from a practical aspect, it was about finding value by analyzing better data and exploiting market inefficiencies. At  a  deeper level, it was about luck being  the critical component in determining life's outcomes.

-A recent  experiment conducted at Berkeley University was very informative – a group of six students was broken into two groups of  three students  and a person was arbitrarily appointed to be the leader of the group. They were then  assigned  some complicated moral problems to solve.  Every  thirty minutes the experiment was interrupted  and four  cookies were brought into the room for the group to eat.  The process was then restarted.

-Incredibly, the person arbitrarily appointed the leader  consistently ate the fourth cookie – and with a lot of gusto.   The leader performed no special task and was randomly appointed just thirty minutes earlier, but still felt he deserved the extra cookie. The experiment  provides an insight into the issue of  Wall Street bonuses and CEO pay.

-It also has a lesson for the young graduates of Princeton  University, as they have been given the extra cookie and will be given even more over time.  It would then be easy to fall into the trap that  they start believing  they deserve the extra cookie.  But they will be happier, and the world better off, if they  at least pretend  that they don't deserve the cookie, and realise that they owe a debt to the unlucky.

A refreshingly honest and thought provoking piece!  As the work of Nobel winning psychologist Daniel Kahneman and others convincingly demonstrates, we are constantly undervaluing the role of luck in our lives – and treating our successes  with more humility would go a long way in making society (and our minds) more peaceful!

Looking at the year-to-date performances of the major  equity markets around the world  leads to some surprising  observations – after the Nasdaq (up 9.72%), the second best performing market is India (up 8.2%) – despite all the negative news on India! China (up 3.7%) ties at fourth.  So our year-end theme of "reversal of fortunes" for 2012 seems to be intact!

We are entering into an important period for global financial markets, with the Greek and French elections this Sunday, the Fed meetings on the 19th and 20th, culminating in the euro summit on June 29th &29th. The scope for supportive policy action has moved higher significantly as this comment from  Goldman summarises (they estimate  a 75% chance of Fed easing at their meeting):

"Even more important than these in the short term, we think that after two months of negative data, bad markets and little policy response, the pendulum is likely to swing back towards policy intervention. In the US, we continue to expect some fresh easing moves at the June 20 FOMC, and recent remarks by Fed officials  have taken a more dovish tone. In Europe,  more proposals, and atmospherics, on deeper institutional arrangements – deposit insurance, fiscal risk-sharing and "banking union" – are likely as we move towards the June 28-29 Eurogroup summit. And while the  Greek election result is likely to begin a messy negotiation process, the market already expects that and we have argued that concerns about an imminent exit – which gripped the market a week or two ago – are overblown. China's easing process has taken another step forward too, with the rate cut. Even if these moves ultimately have limited effectiveness, we think markets could easily continue yesterday's move higher if policy activism increases".
 "In light of the weakening data and the intensification of the Euro area crisis in recent weeks, Fed officials have started to raise the possibility of additional monetary easing. Fed Vice Chair Janet Yellen and New York Fed President William Dudley, for example, identified three conditions that would warrant additional easing. These include: (1) an unsatisfactory pace of economic recovery, such that little or no improvement in labor market conditions is made; (2) sufficiently large downside risks to the outlook; or (3) notable decline in core inflation below the FOMC's 2% objective."
At the same time the Financial Conditions Index has shown a substantial tightening.

The chart below shows the Fed's easing probability as a function of GSFCI, which puts the probability for the next FOMC meeting at around 75%.

Tags: ,

About author

Make it happen !!


Leave a Reply