Some years ago, Goyal and Wahal published a somewhat depressing article that suggested that pension funds and their consultants added no value, on average, in their manager hiring and firing decisions. In particular, replacing poorly performing managers with new ones actually led to worse performance than if the fund had stuck with the old managers (sticklers may insist that the difference was not statistically significant). While these results should not be surprising – remember that the average manager and therefore the average selector of managers must underperform – they still rankle in terms of the professional image of our industry. All this effort, all these consultant billed hours for less than nothing. Embarrassing, to say the least.
To the extent that misery likes company, a study quoted in today’s New York Times, published in the Social Science Quarterly, on the impact of the firing of unsuccessful college football coaches on the subsequent success of the teams comes as a bit of relief. The study suggests that really poor teams don’t do any better after a coaching change, while middling teams actually do worse. For non-Americans, it is perhaps worth noting that college football is a major industry in the US and that successful coaches are worshipped and rather well remunerated (see today’s NYT article).
The two very different situations nevertheless share certain common characteristics. In both cases, there is obviously a tendency to rely excessively on past performance in the decision-making and to extrapolate it overly naively into the future, ignoring the importance of luck and other external factors in the past (e.g., favorable style bias in the case of managers, an unusually talented recruiting pool in the case of coaches). In addition, while the shortcomings of the current manager/coach are well known, the potential replacement’s reputation is as yet unblemished. Finally, if the members of the decision making body are uncertain whether they are really able to identify true talent, they will, of course, want to replace a coach/manager after even a short period of failure and roll the dice again.