tag:blogger.com,1999:blog-2568941354104807757.post6902370151327698219..comments2023-10-05T09:07:24.225-04:00Comments on Investment Performance Guy: Unintended consequencesDave Spauldinghttp://www.blogger.com/profile/01777929408680234896noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-2568941354104807757.post-58265579351304449002010-12-12T13:16:12.336-05:002010-12-12T13:16:12.336-05:00Andre, thanks for both your insights and elaborati...Andre, thanks for both your insights and elaboration!Dave Spauldinghttps://www.blogger.com/profile/01777929408680234896noreply@blogger.comtag:blogger.com,1999:blog-2568941354104807757.post-70506272857763423352010-12-12T12:40:10.774-05:002010-12-12T12:40:10.774-05:00David,
Putting aside all the deep sadness of the M...David,<br />Putting aside all the deep sadness of the Madoff affair, especially the suicides that have been associated with it, I want to reply to your opening paragraph and the technical point it addresses.<br />I believe that there are two valid but emphatically distinct kinds of financial performance attribution whose conflation can only dangerously mislead and never be beneficial. One type, like market factor analysis, etc., explains how different market effects that are not controllable by the fund manager did or are projected to affect performance and/or risk. The other type, which I like to group under the term decision evaluation, explains how different investment decisions that are under the control of the fund manager did affect active properties regarding performance and/or risk. Of course, a market move can influence a fund manager’s investment decision and an investment decision can lead to unexpected consequences. However, the point of decision evaluation is to determine the total effect of a particular decision on a particular active performance property of a fund and that then will, by necessity, include the contributions of that decision’s ‘unintended actions’ on that property. But, since it intends to evaluate the effect of each decision, it does not include a separate evaluation of the effect of the unintended action on that property or on anything else. Also, the effect on aspects of the world other than the particular active performance property being addressed is not properly the purpose of any type of performance attribution. Furthermore, I believe that it is important to precisely define what one means by “how a manager’s decisions contribute to their returns.” For the evaluation of the effect of a market factor or a decision to be meaningful and useful, it must be constructed as a proper exact answer to an economically and precisely formulated question and not be approached informally or even as a purely formal exercise in decomposition.<br />The reason that I believe it is important to be so careful about all this is that I believe that what is not correctly measured cannot be properly controlled or improved. And, as we found out with the Madoff affair, a lot of money, and even lives, can be at stake.Andrehttps://www.blogger.com/profile/10472810725151364022noreply@blogger.com