Michael Mauboussin: How to Build a Team to Make Good Investment Decisions
Introduction ( Via LMCM)
This essay is about how to create a productive investment committee. Topics include how to structure a committee, the importance of classifying problems, how to best gather options, the importance of leadership, methods to decide, and pitfalls to avoid. I have included a checklist at the end. Since most investment committees are already up and running, many of these topics will be helpful in improving results.
Additional Excerpts (Via LMCM)
J. Richard Hackman, a professor of psychology at Harvard University, argues that smaller teams are generally more effective than larger ones. Hackman writes, “My rule of thumb is that no work team should have membership in the double digits (and my preferred size is six), since our research has shown that the number of performance problems a team encounters increases exponentially as team size increases.”
The cost of coordination aside, the size of the group does not matter as much as the group’s cognitive diversity….But this homogeneity can undermine a committee’s ability to make quality decisions because it means that the committee is likely to fail to incorporate important information, perspectives, and experience.
Why does diversity matter so much? Scott E. Page, a political scientist at the University of Michigan, offers a persuasive answer through what he calls the diversity prediction theorem. The equation is as follows: Collective error = Average Individual Error – Prediction Diversity