If you're Jeff Bezos, you're not going to have some random dude manage your money and hope for the best. You're not gonna open up a Robinhood account and risk it all on meme stocks like GameStop. You're going to hire the type of investor who has a Ph.D. in mathematics and drives a Bugatti, a go-getter who wakes up with a turmeric latte and pores over satellite images of factories in Asia to predict the earnings of some 3D-printing company most of us have never heard of. We're talking about the best of the best in finance.
Billionaires and gigantic institutional investors turn to these financiers because they want their investments to make the most money possible, which requires making the right calls on both buying and selling stocks. New research confirms they're whizzes when picking which stocks to buy. But when it comes to the other important part of their job — picking which stocks to sell and when — even these titans of finance are no better than a drunken monkey throwing darts.
The story of this study begins several years ago, when two of its co-authors were feuding in graduate school. Lawrence Schmidt, now at the Massachusetts Institute of Technology, was trained in the old school of economics, which asserts that investors behave rationally when they buy and sell stocks, carefully sifting through information on companies and making the best trades they can. Alex Imas, now at the University of Chicago Booth School of Business, was trained in behavioral economics, which asserts that people's trading decisions can be — and often are — steered off course by the pesky flaws of our brains. "And we started this paper with the idea of settling the fight between the two of us," Schmidt says.