The Intelligent Investor Newsletter – January 5, 2017

Consultiva

A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser)

We are all familiar with the postmortem examination that follows a disaster, along with the accompanying blame game. Such “a posteriori” analysis inevitably suffers from hindsight bias; everyone suddenly thinks that the disaster was predictable and that different actions could have caused alternative outcomes. Richard H. Thaler, considered the father of behavioral economics, recently reminded us of an alternative approach; the ”The Premortem”. Thaler states that premortems help overcome natural organizational tendencies toward groupthink and overconfidence by introducing a devil’s advocate in the decision making process. This is the skeptic that pricks new projects or ventures to uncover unfounded assumptions or to dissect the specifics of processes and designs. While an unpopular function, the point of the exercise is thinking of reasons why a project could fail and guarding as much as possible against it. Thaler also suggests a subtler form of premortem that can help generate creativity and critical thinking. An example illustrates how this approach can work: Suppose a pension plan director communicates to her staff that she just learned that the plan will fail within 5 years. Why? Of course, some will think that contributions are too low or that the investment portfolio is not achieving the desired results. But real progress will be made by thinking of much more mundane explanations. Suppose someone suggests that the cause could be a lack of awareness among participants and lack of education about the importance of contributions. This type of thinking can tackle incorrect assumptions and processes that are thought to be working smoothly. In the end, it is an alternative path to increasing effectiveness and efficiency in our endeavors, something we should all be thinking about in what promises to be a challenging 2017.

by Myrna Rivera, CIMA®
Founder & Chief Executive Officer

 

FURTHER READING AT CONSULTIVA INTERNATIONAL INC.

 

DISCLAIMER:

Consultiva is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. Consultiva has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.

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