1st May 2014
Kevin Murphy of the Value Perspective, from Schroders, gives a behavioural finance take on the Manchester United succession.
Over the last few days, football pundits, players and fans have been queuing up to praise Ryan Giggs for his start as interim manager of Manchester United, with more than a few of them trotting out the line that he could become ‘the new Pep Guardiola’. Here on The Value Perspective we do not deny that is possible – but, really, is it probable?
After a more than respectable playing career, Guardiola has enjoyed a remarkable start as a manager. Widely regarded as a tactical genius, he won everything he could with Barcelona and, despite Real Madrid dumping his new charges at Bayern Munich out of the Champions League this week, he has still taken his sides to the semi-final stage of the tournament in all five seasons he has been a manager.
So, yes, Giggs could follow in Guardiola’s footsteps – but is it not more likely he will mirror the somewhat less stellar career trajectories of his former Manchester United playing colleagues who have turned manager, such as Steve Bruce, Mark Hughes, Paul Ince, Roy Keane, Ole Gunnar Solskjaer or indeed Henning Berg, who lasted 57 days in charge of First Division Blackburn Rovers in 2012?
Now, while the footballing loyalties of The Value Perspective admittedly lie elsewhere than Old Trafford, the point of this piece is not to have a pop at Giggs or any of the other Manchester United alumni. Instead, we will use the way Giggs’s nascent managerial career has been so rapturously acclaimed to illustrate a common behavioural finance error known as the ‘inside view’.
This is where someone spends all their time focusing on the specific attributes of an individual case without obtaining any sort of objective base case or statistical likelihood – a concept known as the ‘outside view’. Thus the inside view on Giggs would focus on aspects such as his successful playing career, the 20-odd years he has already spent at Old Trafford and everything he presumably gleaned from working with managerial colossus Sir Alex Ferguson.
But this would be to ignore the outside view – not least the precedent of all those other players who also enjoyed success at Old Trafford under Ferguson but whose managerial careers have ranged from the reasonably OK (admittedly more so, should Bruce’s Hull City win the FA Cup on 17 May) to the … well, to Henning Berg.
In a stock context, a parallel example would be someone spending all their time looking at an individual business to the extent that they know it inside and out and eventually building up what they believe to be an absolutely compelling case – because they have not considered any outside view and so have not taken into account the broader probabilities of the situation.
We last came across this idea in Ring of confidence, when we noted a tendency for people to make hugely confident statements about the growth prospects of individual carmakers – and, increasingly, individual US telecoms businesses – but, because this is happening across the sector, competitive realities kick in and the forecasts never become reality.
That is why everybody needs a base case – some way of informing our opinions that looks beyond the specifics of an individual situation. In an investment context and in the eyes of The Value Perspective, valuation does precisely that job and does it very well indeed. We feel less qualified to comment on footballing matters although, when it comes to pointers to former players becoming the next Pep Guardiola, we suspect it needs more than a single game against Norwich City, even if it was a 4-0 win. After all, back in 1986, Ferguson’s first game in charge of United was a 2-0 defeat at Oxford.