FA Center: Focusing on past investment performance is costing you future profits

In his new book, “The Tyranny of Metrics,” history professor Jerry Z. Muller argues that investors’ obsession with using quantified metrics for performance assessment can lead to a focus on the wrong things. To satisfy this “quantification addiction,” people focus on those things that can be quantified but are unimportant, while marginalizing those that are not quantitatively measurable but are truly important.

Put simply, we force square pegs into round holes, and try to quantify the unquantifiable. This induces gaming behavior that eludes the purpose of the quantification, and can make actual investment performance worse.

In no field is the tyranny of metrics more prevalent and more misguided than in finance.

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