When evaluating college applications, admission officers try to ascertain whether applicants took advantage of opportunities in high school by taking available advanced placement and honors courses. The purpose of the inquiry is to determine if prospective students took the risk of challenging themselves with harder courses or did they play it safe and take the standard courses.
It is safe to say that when it comes to manager selection, the investment industry is obsessed with statistics. While it starts with performance information, investors slice and dice the numbers to try to glean information about a manager’s risk and consistency, all in an effort to choose the best manager. Lists of top fund managers are often published based on these performance statistics, and investors use these statistics to screen for the most skilled managers.
Investment fund manager rankings, like any study, are subject to the laws of statistics and probabilities. In her bestseller, Thinking in Bets, former poker champion Annie Duke explains a lot about statistics and probabilities. She uses examples from poker and beyond to explain the probabilistic nature of daily life and provides a guide to better decision making. While her lessons go beyond any single application, some are extremely germane to the manager selection process and worth a discussion in that context.
