Think You’re Above Average? You’re Not Alone.


Last year, while delivering a talk to a group of investment professionals, I asked a simple question: “How many of you feel that you are better investors than your peers in the industry?” About 80% of the audience answered affirmatively using anonymous electronic polling devices.

While this may seem shocking and the audience chuckled, I noted that there’s nothing inherently wrong with everyone in the room being above average. After all, the room was filled with individuals who had invested time, money and efforts towards their professional development. They weren’t typical of the industry…and in fact, it is highly believable that they are better than their peers in the industry.


So I asked another question: “How may of you feel that you are better investors than your peers in this room?” This time slightly less than two-thirds (65%) of the audience answered affirmatively.   Again, the audience chuckled...and this time, I joined them.

We had just demonstrated the Lake Wobegon effect , named after Garrison Keillor’s fictional town in which all children are above average. In fact, this illusory superiority is a cognitive bias that has been researched with consistent results across a host of professionals from doctors to investors to academics. It’s also found across age groups.


We humans have a very poor sense of our relative capabilities.

A survey of more than 1 million high school seniors conducted by the College Board found that 70% felt their leadership skills were above average while a mere 2% claimed “below average” capabilities. Other research has found that college seniors take approximately 3 weeks longer to complete their thesis than their most “realistic” estimate…and often around 1 week longer than their “worst case” scenario! This illusory superiority effect is more extreme in MBA programs, where almost 87% of students in one program believed they were in the top two quartiles of their class. And lest we think professors are immune, 90%+ claim to do above average work, with more than 68% believing they are among the top 25% in terms of teaching quality, according to other research.

And then…drum roll, please…for one of the most extreme manifestations of documented overconfidence in the literature. Ready? A full 93% of American drivers feel they are better than the median driver, as documented in other research.

While it’s fun to discuss the rampant overconfidence found among students and professors, or even drivers, it can get downright scary to consider the implications in medicine. A study conducted at the Baylor College of Medicine found that doctors facing hard cases were accurate in their diagnosis a mere 6% of the time, despite having confidence comparable to how they felt on easier cases in which they were accurate more than half the time. Medical overconfidence can literally kill, as noted by a study in which 90 diagnostic errors made over a year led to 36 serious complications and 27 deaths. Yikes!

So why do we human so consistently over-rate our relative capabilities? Why do so many of us actually believe we’re better than average? One possibility is that it’s useful to do so. Overconfident people tend to be granted higher social status by their peers, as noted by many sociologists, so perhaps there are good reasons to act this way.   Remember the scene in Top Gun where Viper (the flight instructor) asks Maverick (a student) if he thinks his name will be on the plaque of the best fighter pilots?

Maverick: “Yes, sir.”
Viper: “That’s pretty arrogant, considering the company you’re in.”
Maverick: “Yes, sir.”
Viper: “I like that in a pilot”

Regardless of the rationale for why so many of us believe so highly in our relative abilities, the blunt reality is that we simply cannot all be above average. Give our robust human tendency to think so, however, we might all be well served by reflecting not only on our relative strengths, but also our relative weaknesses.   An honest self-assessment of our “below average” capabilities can steer us towards developing those skills, and an understanding of relative deficiencies can guide our professional development plans.

But none of this should change how we think of our relative strengths, because ultimately, what matters most is how you see yourself.

The Trans-Pacific Partnership: What You Need To Know


While many of us head to beaches or backyard barbeques this weekend, negotiating teams from twelve nations will be busy working on perhaps the most important trade deal of our generation – the Trans-Pacific Partnership (TPP). On Friday, TPP Chief Negotiators begin a four-day meeting (in Hawaii…so hard to really feel bad for them!) to resolve the open issues before a four-day meeting of Trade Ministers begins next Tuesday. Many are optimistic that negotiations will conclude next week.


The mega-treaty involves twelve countries that combine to 40% of the world’s GDP and 25% of global exports. Building on a four-country agreement between Singapore, Brunei, Chile and New Zealand that had been signed in 2006, the TPP expands the bloc to include the United States, Australia, Peru, Vietnam, Malaysia, Mexico, Canada, and Japan. Not on the list? China.

Much has been written about China’s “exclusion” from the TPP. Some describe an American plan to encircle China’s increasing power by strengthening economic connections, political ties, and military relationships with other Asian nations. While there is undoubtedly an element of truth in this suggestion, there may be another possibility that hasn’t received much attention: China may not want to join.

Having joined the WTO as a developing nation, China enjoys semi-protected status in a host of industries. Joining the TPP might erode some of those barriers. Oh, let’s also not forget that China is quietly pursuing its own agenda, having secured the support of more than 50 nations (including Iran) in setting up the Asia Infrastructure Investment Bank – notably without US involvement.


It’s also worth noting that China is also pivoting towards The Middle East at precisely the time America is pivoting away from it. “Over the past year, Chinese leaders have been flocking to the Middle East,” notes Foreign Policy’s David Rothkopf. The recently proposed Iran nuclear deal has also spurred a strengthening of already improving China-Israel relations, despite the fact that Beijing remains Tehran’s most important customer.

Despite the media attention and focus, is it possible that the TPP is not about China? In fact, there’s good reason to believe that it’s focused on rolling back the protectionist pressures that arose following the global financial crisis. Like all trade deals, TPP targets expanding the pie rather than fighting over slice sizes. Increased military and political cooperation in Asia may simply be whipped cream on the pie. (Sorry, really wanted to say icing on the cake…but had started with the pie analogy!)  With that said, it’s also clear that the biggest beneficiaries of a faster growing global economy are the largest economies – meaning the United States and Japan will likely capture a lion’s share of gains.

According to Huffbauer and Cimino, economists expect the TPP to boost exports of member countries by $440 billion or 7% and real GDP by ~1% indefinitely, with the possibility of bigger gains if more nations join. South Korea has expressed interest, as have others.  Further, the mechanics of the TPP may emerge as the new model for economic liberalization and globalization, and has the potential to ultimately serve as the foundation of a more-constructive trade agreement between the United States and China.

Let’s not also forget that if successfully implemented (and admittedly big “if”), the TPP will affect many people both within and outside of the member countries. How’s that? Let’s consider three possibilities.

First, given the prominence of agricultural subsidies in the negotiations, food prices will move both up and down, depending upon where you live. If you’re in a major food-producing nation like the United States, prices may rise as more domestic production heads to export markets. On the flip side, if you live in a food-importing nation like Japan, you may see lower prices. (Lovely, just what Japan needs…more deflationary forces!). And if you’re a farmer producing protected products (such as dairy in Canada), beware! Foreign competition may be headed your way.   In aggregate, however, lower tariffs should produce lower prices for member countries as a whole. Countries outside of the TPP may face shifting trade patterns. Consider palm oil. Might Colombia lose potential markets to Malaysian producers?

Second, jobs are likely to shift between countries. Given that Vietnam has a trade agreement with China, it’s possible that Chinese companies may outsource their production to Vietnam where labor prices are materially lower and a successfully implemented TPP would offer more desirable export markets. This might slow China’s job creation and economic growth. (Great, just what China needs…more slowdown pressure!). In general, low wage countries will see higher wages and high wage countries will see lower wages. Again, these impacts might ripple beyond TPP member countries. If Vietnamese wages rise, might some of their labor-intensive manufacturing shift to Bangladesh or Laos?


Third, intellectual property protection may result in infinitely higher prices for drugs and copyrighted material (if you pay anything for something that was previously stolen that’s an infinite increase!) in countries in which piracy was commonplace. But the flip side is it may mean lower prices for countries with strong IP protection as companies no longer need high prices for their products in those countries to subsidize losses elsewhere. This may mean lower music, movie, and medicine prices in the US, for instance.   How might that affect the profitability of Bollywood or Thailand’s medical tourism industry?

The blunt reality is that gains from trade are not spread evenly, and although some may believe the global benefit makes trade agreements such as TPP as easy as pie, political realities have an uncanny ability to derail even the most likely of deals. And if TPP negotiations fail to make progress next week, the only dish being served to the twelve Trade Ministers may be humble pie.


5 Ways The Iranian Nuclear Deal May Affect You


The Bastille Day announcement of a nuclear deal with Iran generated a wide range of reactions. President Obama praised the deal, noting it “had stopped the spread of nuclear weapons in the region.” Presidential hopeful Jeb Bush called it “dangerous, deeply flawed, and short-sighted,” while Russian President Vladimir Putin noted “the world today breathed a sigh of relief.” Israeli Prime Minister Benjamin Netanyahu called the deal a “historic mistake” that would enable Iran to become a “terrorist nuclear superpower,” and crowds cheered in Tehran.


While the nuances and details surely matter, the spirit of the deal is straightforward: Iran stops developing nuclear weapons and the rest of the world removes the sanctions.  But it is by no means a done deal. Before the sanctions are addressed, both the United States and Iran need domestic approvals of the deal and the International Atomic Energy Agency has to certify that Iran has done what it promised.

Let’s not forget that US presidential cycle is likely to incite an intense debate on the merits of the deal, as noted by Tuesday’s commentary from the candidates.

If Iran is sanction-free (an admittedly big “if”), what does it mean for us as individuals? I’ve been thinking about this since the announcement and believe there are five key impacts worth highlighting:

First, and somewhat obvious, is that cash-strapped Iran will pump oil like it’s going out of style (which, in fact, it may be!). This means more supply and in the short run, downward price pressure on transportation fuels. Cheaper prices at the pump and possibly less-expensive airline tickets? This could mean fatter profits for transportation companies. And in terms of losers, might the Iranian deal be another nail in the Canadian economic coffin?

Second, and much less obvious, is that pistachio prices will fall dramatically. Iran competes with the United States for the title of top pistachio grower and its exports have been severely constrained by the sanctions. While consumers will benefit, California pistachio farmers will go nuts! (ok, bad pun…). According to the Administrative Committee for Pistachios (yup, there is in fact such a committee!), California production has tripled since 2004. Perhaps these extra nuts will help meet the demand for what I believe to be a forthcoming rise in the global demand for protein?

Third, as global companies stumble over themselves to gain access to a market of 80 million potential consumers (roughly the same size as Germany), Dubai will benefit as a hub from which to enter the Iranian market. With 400,000+ resident Iranians, the UAE is a natural place from which Western companies can stage business development efforts.   Emirates Airlines (as part of its plan for global air travel domination) announced it will launch service to Mashhad, the second city in Iran that it will serve. Non-oil trading between Iran and the UAE was as high as $23 billion before the sanctions but fell to $17 billion in 2014; it is estimated to grow 15%-20% upon their removal. Time to buy an(other) apartment in Dubai?

Fourth, Iran is the world’s dominant producer - with a 90%+ share of global production - of saffron, an aromatic crop that is used broadly in cooking, cosmetics, and even medicine. Because of the extensive manual labor involved in its production, saffron can cost more than gold! Sanctions have severely constrained the sector’s ability to export. If removed, expect more fragrant cuisine globally!


Finally, Iranian consumers will likely travel elsewhere for education and medical services, among other reasons. A United Nations ban currently prohibits Iranians from studying nuclear engineering. Expect this ban to end post sanctions. Entrepreneurs take note: it may be high time to open a Persian restaurant on the MIT campus! Or consider that Iran has the world’s highest nose-job rate of any country and is a global leader in sex-change operations. Given that cosmetic surgery is a very popular reason for medical tourism, might we see Iranians traveling to create literally different images of themselves?

Cheaper crude, collapsing Canada, plentiful pistachios, energized Emirates, fragrant foods, and itinerant Iranians – these are merely some of the ways that the nuclear deal with Iran might affect you.


Creepy Cyber Coincidence? Probably Not.


On July 8, United Airlines, The Wall Street Journal, popular financial blog site ZeroHedge and the New York Stock Exchange all had to shut down their services for “technical reasons.” Although the Department of Homeland Security released a statement saying that there was “no sign of malicious activity” at the NYSE, intellectual speculators quickly joined their financial peers to suggest these events were not coincidental and the result of a coordinated cyber-attack.

Simple probabilities support the view that this was not a set of coincidental technical failures.

Given the criticality of technology to United Airlines, let’s assume for a moment it has a daily reliability rate of 99.99%, meaning it has a system failure once every 10,000 days – which equates to once every 30 years. Seems reasonable. Now, let’s assume the NYSE has a daily reliability rate of 99.9%, meaning it fails once every 1000 days (approximately 3 years). Given the Wall Street Journal doesn’t directly handle billions of dollars or millions of lives, let’s assume it’s daily reliability rate is 99%, equating to one failure every 100 days.

If these events were truly random and independent, then the frequency of all three of these events happening at the same time is – are you ready – once in a billion days (or if you prefer to count in years, almost 2.8 million years!) If for some reason you feel that the WSJ’s reliability is higher (say 99.9%) then the three events would happen even less frequently (once in 10 billion days!). Coincidental failure is possible, sure, but it does seem highly unlikely.



When looking at other global developments, one is immediately drawn to China’s imploding stock market. Might there be a connection? Some have suggested that disgruntled Chinese hackers were behind the attack, a fact that both a real-time cyber attack map from Norsecorp and a digital attack map produced by Google Ideas and Arbor Networks appear to validate. Perhaps the Chinese are not happy with WSJ reporting of the regularly falling prices of their NYSE listed securities?

So What? Whether my speculative musings prove true or false, one thing does seem certain: cyber risks are large, rising, and will affect almost everyone. Travel by air? Even before today’s shut down of United Airlines, the industry has been warning that a major cyber attack is “absolutely inevitable.” Just last month, Poland’s LOT Airlines was grounded after hackers disrupted their flight planning technologies.

Lest you think cyber attacks only affect information, think again. They have the potential to damage physical stuff too. A German steel mill was hacked last year and the perpetrators blocked the control systems from properly shutting down a blast furnace, resulting in massive damage. Given this risk to facilities and equipment, it’s not surprising that insurance giant AIG invested in K2 Intelligence, an emerging leader in the field of cyber security.

And please don’t dismiss these risks as just being about hackers stealing customer information from large corporations. Cyber attacks will soon be a risk we bear in our everyday lives. Use the Starbucks app to buy your daily latte? Cyber attacks have enabled hackers to drain bank accounts through the Starbucks app. As the Internet of Things booms (IDC estimates there will be 200 billion connected devices by 2020), and devices as far ranging as refrigerators to cars are brought online, vulnerabilities multiply.

One particularly problematic area is the domain of medical devices. Insulin pumps can be hacked, as can many other wirelessly controlled medical devices, rendering patients vulnerable to medical cybercrimes. Remember the Homeland episode in which the Vice President’s pacemaker was hacked by terrorists, allowing them to administer a lethal cyber attack? As explained by the show’s producers and noted by Dick Cheney's doctors, hackers can quite literally break your heart.



Sometimes It’s Best to Do Nothing


As a young analyst working on Wall Street in the mid 1990s, I quickly learned the value of looking busy. Activity was seen by virtually everyone as a proxy for initiative. After all, busy people are more productive people, right? They are more ambitious. They are diligent. They are committed.


Consider the following scenario.

Esko Aho, Prime Minister of Finland from 1991 to 1995 and a former colleague of mine at the Harvard Kennedy School, visited my Business Ethics class at Yale last year. During our classroom discussion, he recalled getting a call at 2am from one of his top advisors informing him that “shots were being fired in Moscow."  The advisor feared a coup was underway and Finland would need to handle an influx of refugees, possible military defections, and instability on its 800+ mile border with Russia.

Esko then asked my students what they would have done if they were in his shoes. Everyone agreed it was important to gather top military commanders and begin planning. Some suggested calling Moscow to offer support. Many other ideas surfaced of what could be done to prepare for the likely chaos. After listening carefully to every suggestion, Esko shared what he actually did.

“I hung up the phone and went back to sleep.”

He knew he needed to be rested and alert in the morning because he would likely awake to enormous pressures. He also knew that his advisors would call back if the matter grew more urgent...and he feared that by staying up and acting, he may act unnecessarily.  So he did nothing.  By the morning, the situation had grown less urgent and he was able to plan for various scenarios.

Esko's advice about choosing to do nothing resonated with many of my students, some of whom have spent the past year working in finance.  Several have noted the relevance of his insight to investing.

Investment management is an uncertain endeavor in which risk and reward must be constantly gauged as part of a never-ending quest to generate returns. Because of the probabilistic and unpredictable nature of market movements, every investor is destined to make mistakes. But an investor can choose what type of mistake to make, and in times of full-valuations or bubbly conditions, it’s better to make errors of omission rather than errors of commission. When the potential rewards appear limited and risks elevated, it’s better to do nothing and miss gains than to do something and capture losses. As noted by Warren Buffett, “frequently, the best decision is to do nothing.”

The Taoist principle of Wu Wei captures this spirit well. It translates into the “action of non-action” and implies that one seamlessly moves with the ebbs and flows of natural cycles. While many of us are inclined to act and do things our way, sometimes it’s best to pursue Wu Wei.

Boiling Seas, Sour Wine, & Mad Dogs


As I write this note, Greece has just defaulted on its 1.5 billion euro loan payment to the IMF, Puerto Rico's governor has indicated the island cannot pay its $72 billion in debt, and the Chinese stock market has been falling despite recent government actions to support prices.  While this may seem like a far cry from the "dog days of summer" in which general malaise accompanies high thermometer readings in July and August, it's actually more representative of what was originally meant by "dog days."

Consider the origins of the phrase.  The first reference to the "dog days" was in a Greek poem called "Phaenomena" believed to have been written by Aratus around 300 BC.  Wikipedia notes that "Dog Days," according to Brady's Clavis Calendria, were thought to be an uncomfortable time when "the Sea boiled, the Wine turned sour, Dogs grew mad, and all other creatures became languid; causing to man, among other diseases, burning fevers, hysterics, and phrensies."  Hardly the stuff of lethargic or lackadaisical July and August days...

In fact, the prospect of economic chaos at a time of summer holidays may portend more than boiling seas, sour wine, and mad dogs.  Could the 20% drop in Chinese equity prices in roughly a month be the beginning of what I call vicious vacation volatility?  After all, financial markets tend to be less liquid during July and August, increasing the probability of very disruptive and volatile price activity for weeks to come.

As I've indicated before, markets prices do not appear generically cheap, and as such, the most prudent course of action is to exercise caution.  Better to miss gains than capture losses, and to make errors of omission rather than of commission.

I'll continue to comment on developments I find interesting and noteworthy.  In addition to posting my thoughts every Wednesday on my website, I have also begun posting them to LinkedIn, Facebook, and Twitter.  Listed below are links to my most recent comments.  As always, I'd welcome feedback!


Asia's Devotion to Specialists

The most ambitious experiment in education today is taking place in Singapore where the Yale-NUS College is attempting to introduce a residential liberal arts program in the heart of Asia, a region known to highly value specialization and expertise.  Click HERE for my comment.


Medical Tourism Boom!

The emerging market middle class is booming, and as it does, it will consume more and more healthcare services.  At the same time, the developed world is aging and faces financial pressures to support underfunded retirees.  The result: people will increasingly travel to find capabilities within their medical and financial constraints.  Click HERE for my thoughts on globalization meeting healthcare.


Misguided Diversity

In early June, I attended a National Association of Corporate Directors Master Class.  What I heard over discussions bothered me a bit -- corporate boards in general are so focused on depth of expertise that they're minimizing breadth of experience.  I believe the pendulum has swung too far in the direction of depth and it's time to more highly value breadth.  Click HERE for my piece.


Colombian Peace Coming?

Colombia has been making, albeit less rapid than hoped, progress towards ending its 50+ year domestic civil war between government forces and the FARC guerrillas.  When reviewing statistics, I was struck by the amazing progress the country has made over the past decade or so -- economically, socially, and in terms of security.  Is it possible that prosperity can produce peace, rather than vice versa?  Click HERE for more.


Within the Gloom, A Travel Boom?

As the emerging market middle class continues to boom, one of the areas that seems destined to grow with Energizer bunny consistency is travel and tourism.  In this short piece, I dig into the tourist arrival data gathered by the US Department of Commerce in their Office of Tourism and Travel Industries.  What I find suggests a forthcoming boom in global travel.  Click HERE to read my note.


The "Art" of Spotting Bubbles

This past May broke many art market records, leading me to ask the question of "So What?"  World record prices are a wonderful indicator of confidence, possibly even overconfidence.  The short piece I wrote concluded that arts markets were flashing a warning signing, which when combined with full market valuations, implied that the risk-reward tradeoff in financial markets was not favorable.  CNBC Europe picked up my piece and had me on air discussing the implications of art market exuberance.  Click HERE for an excerpt from my CNBC interview, or HERE for the piece I wrote.

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