164 THE CREATIVE INVESTMENT TEAM
swer is no. Hulbert explains that in this test you would expect to
see four false positives. In other words, by sheer luck, four news-
letters should have outperformed. Put another way, if you had 89
coin flippers, four of them would show “expertise” in coin flip-
ping, even though we know that they would simply be experienc-
ing good luck. Hulbert conducted the same study with newsletters
that have five-year records and got similar results: 219 newsletters
and 10 winners. But the number of false positives was predicted to
be 11. What’s the conclusion? There is no evidence that any of the
newsletters outperforms. Regardless, because of overconfidence,
investors chase the latest winner, and marketers play on this be-
havior mercilessly. They advertise one-year performance numbers
with a bullhorn from the tops of buildings. (Finally, their clatter
woke up Arthur Levitt at the SEC, and he personally sent out a
message warning firms about this practice.)
David Dreman and Michael Berry also studied overconfidence
and got similar results. In fact, their study, conducted in 1995,
showed that analysts’ estimates were actually deteriorating in ac-
curacy! The forecast error for estimates (that is, a prediction of by
how much analyst estimates would miss the actual reported earn-
ings) had moved from the 20–30 percent range up to more than 60
percent by 1990.
Dreman also points out in his writings that analysts bolster
their already inflated confidence by spending hours on additional
research, collecting additional bits of information on companies.
Typically this extra digging doesn’t improve the investment deci-
sion, but it does let the analyst sleep better.
So what’s to be done?
The quality of creative thinking can be enhanced only if inves-
tors practice letting go of their certainty. After all, thinking is the
capacity to hold different points of view, to consider things from
all sides, and finally to make a decision. Somehow in this culture,
we got it just backward: We consider the smartest people to be the
ones who are absolutely certain of their answers and can win any14-25 ware 164 1/19/01, 1:15 PM