Are You Spock or McCoy?

We started reading James Montier’s new book while snowed in over the weekend, and can already see that we’ll have lots of little tidbits to share from James’ Little Book of Behavioral Investing.  We’ll aim to do just that over the next several weeks.

For the Trekkies out there, James compares the two different systems embedded in our mind to Dr. McCoy and Mr. Spock.  Whereas McCoy was “irrepressibly human, forever allowing his emotions to rule the day,” Spock was “determined to suppress his emotions, letting logic drive his decisions.”

The McCoy part of our brains (the X-system) is the default system, which has evolved over time for survival.  The Spock part of our brains (the C-system) is a more logical component of processing information.  Needless to say, from an investment perspective, we are best served by the C-system although James warns that “emotion is designed to trump logic” which we can all attest to after riding the 2008-2009 S&P rollercoaster. 

Lucky for us, James highlights three simple questions designed by Shane Frederick of Yale to measure the ability of our Spock to keep McCoy in check.  Consider this:

1. A bat and a ball together cost $1.10 IN TOTAL. The bat costs a dollar more than the ball. How much does the ball cost?

2. If it takes five minutes for five machines to make five widgets, how long would it take 100 machines to make 100 widgets?

3. In a lake there is a patch of lily pads. Every day the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long will it take to cover half the lake?

We think these three questions with their “obvious incorrect answers” demonstrate what Warren Buffett meant when he explained:

Success in investing doesn’t correlate with IQ once you’re above the 100 level.  Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.