In his 2008 book, Outliers: The Story of Success, author Malcolm Gladwell argues for transforming outliers (extraordinary levels of individual success) from mysteries to rational outcomes by isolating explanatory factors and narrowing samples to instances exposed to those factors. There are aspects of the arguments presented in the book that are relevant for investors/traders, such as:
From Chapter Two: “The idea that excellence at performing a complex task requires a critical minimum level of practice surfaces again and again in studies of expertise. In fact, researchers have settled on what they believe is the magic number for true expertise: ten thousand hours.”
Ten thousand hours translates roughly to a full-time job for five years. Those seeking proficiency at the complex task of investing/trading should be cautious about assuming there are shortcuts to expertise. Could retaining a financial advisor with the prerequisite experience be a substitute for direct practice? One might argue that five years of practice is necessary for expertise in choosing good advisors.
From Chapter Six: “…[S]uccess arises out of the steady accumulation of advantages: when and where you are born, what your parents did for a living, and what the circumstances of your upbringing were all make a significant difference in how well you do in the world.” And, from Chapter Seven: “…[E]ach of us comes from a culture with its own distinctive mix of strengths and weaknesses, tendencies and predispositions… Who we are cannot be separated from where we’re from…”
Identification of factors most relevant to differences in returns among financial assets is critical to prediction by inference. A focus on irrelevant factors produces defective (non-predictive or useless) inferences. Also, more personally, those seeking success as investors/traders should understand the behavioral biases that burden them and the way those biases affect their decision-making.
From Chapter Eight: “Working really hard is what successful people do…”
Who has the greater prospects for success — an individual who persistently works hard to market a stock or options trading advisory service, or an individual who subscribes to the service as a way to get rich quick?
From the Epilogue: “Superstar[s]…appear at first blush to lie outside ordinary experience. But they don’t. They are products of history and community, of opportunity and legacy. Their success is not exceptional or mysterious. It is grounded in a web of advantages and inheritances, some deserved, some not, some earned, some just plain lucky… The outlier, in the end, is not an outlier at all.”
With enough study, one may be able to understand why superficially extraordinary financial market outcomes are not really extraordinary, implying that one may be able to predict them.
At the end of Chapter One, Malcolm Gladwell asserts: “We could easily take control of the machinery of achievement… but we don’t. And why? Because we cling to the idea that success is a simple function of individual merit and that the world in which we all grow up and the rules we choose to write as a society don’t matter at all.” And, at the end of Chapter Nine, he advocates: “To build a better world we need to replace the patchwork of lucky breaks and arbitrary advantages that today determine success…with a society that provides opportunities for all.”
A “society that provides” likely requires a “provider class” with, in this case, the power to enforce their definitions of “success” and “opportunities.” This provider class must be wise so that they can foresee the emergence of new opportunities and beneficent so that they do not exploit their power for personal (or family or affinity group) advantage. Is this vision an approachable noble ideal, an illusion of controllability or simply a path to power for the ostensibly “wise and beneficent?” Can the Securities and Exchange Commission and the Federal Reserve, and government more expansively, design and maintain a system of financial market interventions which greatly reduce the risk of failure for hard-working investors?
In summary, Outliers presents transformations of context to explain, retrospectively, why (positive) outliers in human performance are not really outliers but rather logical results of a “patchwork of lucky breaks and arbitrary advantages.” The book offers no proofs (or even examples) of the predictive power of the beliefs it advocates.
One might interpret Outliers broadly as advocacy of a highly intrusive, norm-enforcing socialism guided by meritorious researchers. Perhaps in his next book, Malcolm Gladwell will present examples of actual societies which successfully modeled such an approach. Extensive norm enforcement, if practicable, would narrow the distribution of backgrounds, traits and behaviors and produce a non-adaptive population. Evolution values persistence of diversity, as well as natural selection.
