Rules, not judgment

The main benefit of the stock market is that it teaches us lessons about human behaviour that have wider applicability.  One lesson of the market's recent fall is that it's better to follow rules than judgment.
When I sold stocks a few days ago, it was not because I could foresee that the market would subsequently drop 5%. No-one has such futurological insight.
Instead, I sold because statistics and theory told me that the rule "sell in May" was better - on average - than judgment-based calls on the market. The market's fall vindicates this*.
But of course, it's not just judgments about the stock market that are fallible. Experts get it wrong in fields as diverse as football, medicine and politics (pdf).
Sometimes, these errors are fatal. Take, for example, the case of Anthony Rice, who after being released by the Parole Board, committed murder.
This was clearly an error of judgment. But the Parole Board's response seems to be that it simply needs to try harder, to gather more information. There seems no awareness of the fundamental problem - that errors in expert judgment are ubiquitous, and that perhaps rules or statstics-based decision-making might be superior.
I draw two inferences here. First, policy-makers should take lessons from stock markets.
Second, the advantage of markets over government is that they allow us to avoid the tryanny of fallible experts. In my investing, I can avoid errors of judgment. The same, tragically, cannot be said for Naomi Bryant.
* Of course, the fall might be reversed. But in getting out of the market, I've saved myself the worry of whether this is will be the case - which is worthwhile in itself.

Comments

[Marcin Tustin]

The reason why experts must be involved is because where the rights of the citizen are being determined, they must be able to put their case, and the burden of proving a need to extrac a penalty must be put on the state. This rule stands quite apart from the Human Rights Act as a part of the common law.

[Jack]

But who writes the rules?

[chris]

Jack - the rules I have in mind are NOT externally imposed. Rather, they should emerge from within the practice by research and statistical analysis. In investing, this means "sell in May" and "be a passive investor" (unless you differ from the average person). In cricket, it might mean "never play the reverse sweep" (ditto caveat).
The point is to get away from relying upon judgment.

[Paul Evans]

It's an interesting point Chris, but doesn't this run counter to your general dread of managerialism?

This seems a prescription for management by risk-aversion only.

I'd suggest that fallible decision-makers are preferable to the alternatives. A democracy is, surely, preferable to a technocracy? Would you prefer to be tried by a judge and jury or by a panel of criminologists?

Would you prefer past performance to be the sole determinant of future performance in every part of the economy.

The thing is, sometimes people are released from prison, the wrong call is made and someone suffers the consequences. I'd prefer to live somewhere in which this happens, than in a society where all risk is ameliorated.

Wouldn't you?

[Peter]

One problem is you can only invest up to £7,000 per annum tax-free. If you withdraw all your investments every May, you can only ever have £7,000 invested each year.

[Peter]

One problem is you can only invest up to £7,000 per annum tax-free. If you withdraw all your investments every May, you can only ever have £7,000 invested tax-free.

[atkins]

This sounds like the Wisdom of Crowds thesis.
See http://en.wikipedia.org/wiki/The_Wisdom_of_Crowds

[The Pedant-General]

And in the case of markets is self-defeating: it ONLY works because people DON'T, on average, follow your rule.

If they did, the rule wouldn't exist following the first panic selling crash in May.

Equally, you have made your cash this year by bucking the trend, by doing that which the average person current does NOT. In most walks of life, this is a risky strategy.

PG