With the new Star Wars film imminent, speculation about its plot is rife. I’m not up on that speculation. But I assume most of it surrounds the possibility of settling, once and for all, that most controversial of debates: Han Solo or C-3PO - who is the better investor? 
I’m not optimistic. The earlier films prospered despite their glaring lack of investment detail, and I suspect Episode VII will be no different. So here instead is my own view, which should put the whole thing to bed.
The key exchange comes in Episode V, as Mr Solo tries to evade capture by flying his ship through an asteroid field. This prompts C-3PO to point out “…the possibility of successfully navigating an asteroid field is approximately 3,720 to 1!”
“Never tell me the odds!” responds Mr Solo, before entering the asteroid field anyway.
This is reckless. I meet a lot of investors like this. They are high on confidence and low on fundamental analysis; a dangerous combination. Instead of diligent calculation, they take big risks on gut instinct and a good story. Unfortunately, that story usually ends badly.
The trouble is, the longer they defy odds by dodging investment asteroids, the more they look like an incredible ‘1-in-3,720’ investment talent. Or, put differently, of 3,720 portfolios run this way, probability suggests 3,719 will be destroyed, but one will survive. This survivor’s fund will top the performance tables, will sell like hot space cookies and will be heralded as a work of genius.
It isn’t though, it’s luck. And that luck will run out.
We all love a charming maverick. That’s why we make movies about them. No movies were made about the 3,719 dashing rascals who smashed their ship into a passing rock though. This is precisely because they smashed their ship into a passing rock. The story of a man who needlessly attempted to defy astounding odds but failed, is basically the story of an idiot. And that makes for poor box office (Coen Brothers excepted).
So, case closed. We should stick our money with the golden robot.
Not so fast.
While C-3PO shows an admirable willingness to engage in probabilistic upside-downside analysis, I suspect he is wrong. Bland statistics are the first refuge of the dull minded. It is a lively imagination, instead, that is better for identifying leftfield risks.
Returning to the film, there is good reason to doubt a dull droid’s ability to calculate realistic probabilities. Only the night before, for example, Mr Solo had survived a Hoth snowstorm, thereby defying R2D2’s odds of 725-1. The chances of surviving that and the asteroid field, which – spoiler alert – he does, are 2,697,000 to 1.
You could argue then, that Mr Solo is astoundingly lucky. But this mirrors investment bankers’ VaR calculations during the financial crisis. These suggested they had encountered an event that, statistically speaking, should not have happened even once since the beginning of the universe (a long time ago, in a galaxy etc.). So that’s either jolly bad luck, or their calculations were magnificently wrong.
Where could C-3PO’s calculations be wrong? I suspect he’s basing them on records of asteroid collisions. For one thing, such a database would suffer from casualty bias (as opposed to survivor bias). Why would there be records of ships that survived an asteroid field?
But even if those records were complete, it’s likely his base rate is wildly imprecise. How dense, for example, is the asteroid field? How large is the ship? Is it manoeuvrable or on a pre-set course? How slowly is it flying? And this is before we even broach the nebulous subject of pilot skill and experience.
In essence, C-3PO is saying that the average spaceship cannot survive the average asteroid field (so don’t bother trying). This resembles the key argument for passive investing; the average fund cannot outperform the market (so don’t bother trying).
I applaud using statistical analysis to make better decisions, but this statistic is wildly imprecise. How efficient, for example, is the market? How large is the fund? Is it manoeuvrable or tied to the benchmark? How slowly is it trading? And this is before we even broach the nebulous subject of investor skill and experience.
So, given C-3PO’s poor track record and lack of imagination, I can forgive Mr Solo wanting him to “shut up or shut down”.
What is missing – as any good Jedi will know – is balance.
Mr Solo’s skill and scepticism are useful traits, as is his willingness to do the unexpected. His confidence is also a necessity. But this can be fatal if not tempered by humility. Human biases damage investment returns, and overconfidence is one of the classics. Knowing when to engage the cold, factual detachment of a droid is one of the best ways of keeping this in check (but is not sufficient in itself to outperform).
Back to the original question: who should we back as an investor?
Easy. Yoda.
Simon Evan-Cook is a senior investment manager at Premier Multi-Asset Funds. The views expressed above are his own and should not be taken as investment advice.
