Can I Lose On Purpose?

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  • on April 9th, 2011

In responding to a great piece from Ivanhoff on using intuition, I went looking for an article by Michael Mauboussin discussing the role of intuition.  While I couldn’t find what I recall reading on that topic, I did stumble upon a piece he wrote last year called “Untangling Skill and Luck”.  I encourage you to read his article before reading mine…not only is it better sourced, but full of vivid examples like the following:

“the outcomes for activities including chess and running races are close to pure skill, while games of chance, including roulette or the lottery, are close to pure luck. Most activities are in between these extremities and combine both skill and luck. To place activities, you have to think carefully about the forces that shape outcomes.”

We can easily show the role of skill in sports by purposefully missing a putt or a free throw.  The question is, other than churning myself to death, could I lose money on purpose?  I think the answer is unequivocally yes.  That said, I could review hundreds of trades made over the years that offered no great expectancy with outcomes totally reliant on luck.  There is no place for those trades, they are time and energy wasted chasing nonsense…taking the other side could just as easily have resulted in gains.  If I had to lose on purpose, where would I turn?  I’d offer the following setups that I believe over time would lead to losses:

1) Chasing- following the largest intraday bar after a series of intraday bars in the same direction

2) Disbelieving- fading the first large bar outside a range after a series of bars inside the range

3) Extrapolating- following the first break of a popular moving average without considering the slope of the average

I haven’t crunched the data to back this up, but experience tells me these are surefire ways to lose.  Shouldn’t I then restrict my attempts at winning to the opposite of these?  Generally, I do…but it’s much tougher in practice to execute these, and only these, sources of edge.  The perspective here on purposeful losing helps a little built in both cutting the nonsensical guesswork from my routine AND making sure I execute when the favorable setups I seek do appear.  As Mauboussin concludes “Studies of business and investing point to skill in both domains, although the percentage of companies or investors with skill is small.” The smartest thing we can do is to eliminate the luck-based fluff and hone in on the areas where our own skill set shines.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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