This is not a mistake professionals make. This is an amateur mistake, to forget your discipline like that. Pure ego. “I know better than the market.”

Nope.

The problem (for all of us) is that people in positions of power almost never have any experience with finance or math or probability and suffer from a great deal of overconfidence. They make an error and refuse to admit they are wrong, so they compound the error. You see this played out over and over again in American politics.

In The Daily Dirtnap, I recently asked my subscribers if they could think of a trader who went on to occupy a position of authority, because I couldn’t think of any.

They thought of one! Jon Corzine. But his undoing at MF Global was because of… you guessed it—overconfidence!

Zero Hedge’s tagline is, “On a long enough timeline, the survival rate for everyone drops to zero.” Of course that is a Fight Club quote, but it applies here. Eventually, given enough time, everyone will suffer from overconfidence and blow him- or herself up.

You will find that the investors who last into their seventies and eighties are very boring, cautious people. Not the types of folks that make triple-digit returns.

A Complete Lack of Introspection

Politics aside, when I look at potential leaders, I like to look at how introspective people are, their awareness of themselves, their strengths and shortcomings.

I try to imagine XYZ presidential candidate in a position where they have to admit that they’re wrong. Can they do it?

It’s one thing to do it as a trader, when lots of money is at stake. But what if you are president—and lives are at stake?

Otherwise, they are in the position where they have committed an error and continue to compound the error, doubling down, with possibly grievous consequences.

Of course, this quality isn’t often found in presidential candidates, because you need the confidence of a Rickey Henderson to run for president. You have to be that insane.

This cycle, we have a slate of candidates who appear to be fully convinced of their own infallibility. I think the problem is more acute than in previous years. You might confuse overconfidence with strength this time around, but that is an error you won’t make twice, I assure you.


Jared Dillian is editor of Mauldin Economics' The 10th Man.

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