Whether you’re buying a stock or drafting an NBA player, it pays to avoid standard causes of human misjudgment. (link)
In the case of the 2008 NBA draft, most NBA teams committed a huge error of omission when it came to Russell Westbrook. He went overlooked and underappreciated by nearly everyone but the Seattle SuperSonics. There were three key causes of misjudgment associated with this oversight:
- An over-reliance on quantifiable data: Most front-offices calculated too much and thought too little. Russell Westbrook was not a very quantifiable player.
“There wasn’t much data to predict his future. Most experts pegged Westbrook as a mid-first round pick.” (link)
“He didn’t start in high school until his junior season and didn’t earn a scholarship to UCLA until after his senior year. He couldn’t dunk until he was 17 and owes his career to a late growth spurt that shot him to 6-foot-3.”
- Anchoring & Adjusting: Anchored to their prior assessments, most front-offices weren’t willing to properly update their old assumptions with new information.
“Westbrook’s combine performance, against players who were supposedly better than him, only made the Sonics more curious. ‘He was the best athlete in the gym,’ Weaver said. ‘I was sitting in my seat trying to contain myself.'”
- Social Proof: Most professional basketball analysts and front offices did not list Russell Westbrook near the top of their draft lists. Those relying on social proof likely assumed that the crowd’s consensus was rational and accepted it as accurate. Ed Thorp calls this behavior ” the lunacy of lemmings”. (link)
“One day, Weaver went to Presti’s office and declared: ‘I’m looking at everybody, and I don’t understand why this guy is not the best of the group.'”
Investment Lessons:
- Standard Causes of Human Misjudgment create great investment opportunities…just so long as you can avoid them yourself and remain objective. In essence, follow the advice from the poem “If” by Rudyard Kipling;
“If you can keep your head when all about you are losing theirs…” (link)
- Not everything can be quantified. As Charlie Munger says;
“There’s never going to be a formula that will make you rich just by going through some numerical process. If that were true, every mathematical nerd that gets A’s in algebra would be rich. That’s not the way it works.” (link)
- Qualitative Investments can be very lucrative. Warren Buffett’s best investments have been qualitative in nature;
“Interestingly enough, although I consider myself to be primarily in the quantitative school…the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a “high-probability insight”. This is what causes the cash register to really sing.” (link)
The Seattle SuperSonics relied on qualitative factors such as Russell Westbrook’s character, competitive drive, and shear athleticism, to develop a high-probability insight that paid off in spades. (link)
“That was the day Westbrook sold him. Presti and Weaver looked at his story-overcoming the odds to become an indispensable part of a winning team-and saw his relentless competitive streak. ‘We don’t know how good Russell Westbrook will be,’ Presti said, ‘but the person that Russell Westbrook is will allow him to maximize his potential.'”