The Hindu Business Line : Wobegon effect

A year back, my friend invested Rs 10 lakh in certain stocks that his financial adviser recommended. His investments are now worth just over his initial investment. He is obviously complaining. His financial advisor's testimonials were excellent. He was said to be "above average." So why then, my friend wondered, did his investments perform so poorly? Needless to say, his financial advisor, like most in that industry, suffers from the Wobegon effect. It simply refers to our behaviour to overestimate our achievement or capabilities. This behaviour is named after the fictional town Lake Wobegon from the radio series A Prarie Home Companion, where the programme host used to say, "all children are above."

Think about it. It is mathematically absurd to say that everybody is above average. After all, if you are an above-average driver, it certainly means that are some or many who are below average. Yet, studies over time have shown that people, when surveyed, always thought that they are above-average drivers!

John Cannel, a physician, coined the term "Wobegon effect" during this study of the quality of schools in West Virginia. True to the effect, he found that education officials in all schools in that district thought that their students were above average.

This effect is true in all walks of life. You will find company brochures claiming that their portfolio managers/analysts can deliver above-average returns. Beware. You might be a victim of the Lake Wobegon effect!

In my friend's case, his financial advisor turned out to be "above average" not considering 10 transactions that he made during 2005-2006. Those trades generated huge losses which, if included, would have pushed him to the "below average" category.

(The author is based in Ontario, Canada)

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