The loser’s game: Lawrence Evans on skill, bias, and better decisions

“The Angle” Music

Cold OPEN: “I think AI enormously helps with knowledge acquisition. I don't think I yet see with AI in any sense that it enhances active investing competence, yet. Knowledge is not competence.”

Justin Thomson

Welcome to The Angle from T. Rowe Price, a podcast for curious investors. Just a reminder that outside of the U.S., this podcast is for investment professionals only. Thank you for joining me today, I'm Justin Thomson, head of the T. Rowe Price Investment Institute. My guest today is Lawrence Evans, founder of Salomon Partners. Lawrence is a coach, not in the sporting sense, but to professional investors and investment teams, dedicated to the craft of better decision making. In this conversation, we're going to explore Lawrence's perspective on what separates the best investors from the rest. His emphasis on self-awareness and discipline, how elite teams are built, and why he believes investing excellence is far more about learned behaviors than innate talent. Lawrence, welcome to The Angle.

Lawrence Evans

Thank you. Justin.

Justin Thomson

Great. So as an investment coach, tell us what you do in practice, and perhaps explain to people who might not be, be, familiar with the idea of socratic questioning.

Lawrence Evans

Yeah. So as an investment coach, the bedrock of what I do is I don't tell people how to run money. I'm not a management consultant. I'm not a tutor. I'm not a teacher. I'm not a psychiatrist, I’m not a psychologist. But I am a coach. An investment process, a skill coach, which, in essence, is I ask questions of an investment process and philosophy. And I have two ears and one mouth, and I try and use them in that proportion. Meaning, I ask more questions than I get answers. Or, and for me, the socratic part is to challenge also the responses. When I hear disconnects in the answers from those people. And I think part of the toolkit that I have that I tried to build, was having some tools to give them when they have disconnects. And so, in investing, I think it's not often talked about, but skill development is a risk-free trade for active investors. And, you know, to have more skill is never a negative. And, I've been lucky enough to work with a, with thousands of active investors over the years. But it is all about that risk-free trade.

Justin Thomson

So developing skill is a risk-free trade. And I'm quoting you back here, Lawrence. But you said that in this industry, what defines skill is poorly understood. So, in your mind, what qualitatively defines skill in investment.

Lawrence Evans

I'd say skill firstly is not near-term return, which a lot of the industry thinks it is. So, if you had ten investment teams on a, on a platform, quite often the head of those teams will determine who is the most skilled of those teams by the near-term outcome from the funds of those teams. I think that is a flawed measure of skill. If skill is, and why? Well, because luck plays a material role in those near-term returns, whether we want to like it or not. You can be right for the wrong reasons, and nobody really wants to address that. If someone's right on an outcome and has good near-term returns, they take it. But, for me, skill has to be something you control. In any sport, in any activity, it is what you control that is the skill. And in investing, you get market information coming into an investor, and based on some decisions out pops some form of near-term return, be it good or bad. The part of that whole input process/outcome bit the investor controls, is the middle bit, is the process bit in which sits buying stuff, selling stuff, and sizing stuff. And in my world, skill is what you control. And what an investor controls is the rules to buy, the rules to sell, and the rules to size. Plus, it needs to be cognizant of having a mechanism that's systematic or explicit to help them understand when those rules need updating, given a changing macro or micro world. So, in essence, skill is a mindset. It's also an equation. And I coach to that equation.

Justin Thomson

Skill is learnt. And I think that's what makes investing a career one of the most rewarding there is, is that that, is a career that you can get better and better over time with application. Talent is innate, but you have gone on record saying that innate investment talent doesn't exist. Let me just challenge that assumption for a minute. Surely there must be some people that are better disposed to being successful in this industry than others.

Lawrence Evans

Yeah. So let's let's pick that apart. Let's distinguish skill from talent. So maybe the analogy would be in basketball. A potentially talented basketball player is a tall basketball player. Because you have the raw materials that give you an advantage at the outset. That doesn't mean to say that that basketball player can't add practice-based skill to that talent. However, in investing, I don't believe height exists. I don't believe there is anything I've ever seen that would indicate that someone is a more naturally talented investor, leaving college, leaving school, leaving, or moving into adulthood. I've never seen any causal stuff. What I have seen, though, in my years of coaching some phenomenal active discretionary investors, is there are only two commonalities of the greats, that I've been lucky enough to meet. One is something that is, well, both things are learnable. They are not innate. One is a hunger to understand one's self, with all one's strengths, and all one's weaknesses of character. And be as fascinated with it in year 20 as year one. So, self-awareness is at the heart of skilled investing. The second part is almost a religious focus on explicit discipline of executing the rules that you have for your process. Both of those things are not innate. They are learnable. So, other than that, no, I don't see talent in investing.

Justin Thomson

Good answer. In this podcast series, we have talked a lot about behavioral biases. We've had Herman Brodie, we've had Annie Duke, and how those biases impact one's investment decisions. Lawrence, what are the most common biases you observe?

Lawrence Evans

The most common biases I observe are the ones that are more involved with the exit from an investment, rather than the entry to an investment. They tend to be the more punishing of the 150 to 175 identified individual behavioral financial biases that many books have been written about, by Kahneman, and the like. And a lot of people focus more on the getting into a position in a so-called new idea, than they do on the getting out of a position. And getting out of a position is by definition, there's a lot more history to a position. There's more baggage. You've lived the trade. When you enter a position, it's new, it's refreshing. There's no baggage. And so, leaving a trade is inherently difficult in many ways.

And one of the most significant biases that I'm sure Herman and Annie talked about would be loss aversion, which says human beings hate losing two and a half times more than they enjoy winning. Therefore, a 10% loss feels two and a half times as bad as a 10% gain feels good. And people take more risk with losing possessions than they do with winning positions. And cutting a position that's going against you, which is a small loser. When you prevent that by cutting, becoming a big loser, might be the rational thing to do, but it's very hard for humans to crystallize that loss. Very hard because of the two and a half times factor. And so, in all I do, I very much see the low hanging fruit for investors to be more focusing on the irrationalities and the patterns of behaviors exiting rather than entering.

Another one would be the sunk cost fallacy, which would be an analyst or a PM has invested a large amount of intellectual capital in the research around a position. And just because the position is going against them, they don't want to have wasted all that time and accept that it's, you know, part of the tuition of investing that you take a little loser. They want to be proven right. The society values that and they value that. And so, from a behavioral standpoint, I think those would be examples of some powerful biases that one potentially can address.

Justin Thomson

So let me, let me synthesize that. So, because of the sunk cost of the time and emotional energy, the baggage of having a loser, the cardinal sin of investing is not applying the same discipline to your sales as to your buys. I think that's probably the best, the best synopsis I can give.

Lawrence Evans

Agreed.

Justin Thomson

Okay, let's talk about decision making again. You make the distinction in sport between amateurs playing not to lose, which you refer to as weakness mitigation, and professionals playing to win, which is strength maximization. In investing, you say the first objective is not to lose. Why don't we build that one out a bit.

Lawrence Evans

Yeah. So, impressive work by Charles Ellis in the early 70s on, a paper called The Losers Game. I would encourage your listeners, perhaps to read that, those haven't read it. And it, it, discusses the fact that, referring to a book about amateur versus pro-tennis, as you say, that they are two different games wrapped up in the game of tennis. And amateur tennis players win by not hitting the ball into the net, and allowing the other person to make the mistake. And in pro-tennis, it's a different game altogether, whereby the winner of the tennis match is the one that makes the best, the most number of outright winners. And it is the conjecture of that paper, was that in the early 70s, the institutional business became, which was from the 1920s, 30s up until the 70s, a winner's game, meaning that was all about investing to win. It was all about the winners. That it transitioned, with the advent of more efficiency in markets. It transitioned into being a loser's game, whereby you succeed by not letting small losing positions turn into big losing positions, and it's, I believe that a lot of people still think of the professional active game as being a game where you have to make the most money and the hit rates matter most, meaning being right is the most important thing. Whereas I think in my experience, cutting losing positions before they become catastrophic positions, i.e., following the loser's game and letting the winners almost take care of themselves is a more advanced strategy and one that a lot of people aren't trained on.

Justin Thomson

They say a credit investor walks with his head down, looking for the cracks in the sidewalk, and an equity investor lies in the gutter looking up at the stars. So, are the rules different for credit and equity investors?

Lawrence Evans

No. In a loser's game, be it credit, or be it equity. Watering weeds is never a good idea. Neither is cutting flowers. And most humans who enter credit or equity are trained by their bosses to water weeds, i.e., when something is down and you reunderwrite your thesis, if you're intelligent as we thought you were, you buy more. And my point is you can never time insurance.

If you were buying a house, you'd never say to your partner, do you think we should have insurance this year? You have it. There's no debate. It's the cost of doing business. And yet in professional investing that's been forgotten. And in my simple coaching world, when somebody puts a position on, they have to decide ex-ante, be they equity or be they credit, they have to decide ex-ante when are they out. Not as the trade deteriorates, not as a position goes against them. They have to have the criteria, and what that means with signposts along the way for when they are exiting that position. Most don't.

Justin Thomson

An ex-ante and explicit.

Lawrence Evans

Yes.

Justin Thomson

Is there ever a situation where averaging down is valid?

Lawrence Evans

Yes.

Justin Thomson

I mean, it stands, it stands to reason, and I'm just advocating here, it's the same investment, I'm just getting it at a cheaper price.

Lawrence Evans

Yes, and averaging down is absolutely permissible before the ex-ante exit kill criteria, as Annie Duke would say, is reached. That is absolutely fine. And often to your logic, it's cheaper now. The thesis is still intact. I should buy more. It was high conviction. It's now higher conviction because it's cheaper. Totally fair. However, at a point where you're kill criteria level has been reached, you lose the right to add more, and you probably almost certainly lose the right to own the position that you did own in the previous size. That is the discipline of a loser's game.

Justin Thomson

So, Annie actually borrowed that expression, kill criteria, from the military. It describes a set of circumstances at which you abandon the mission. And importantly, that is not the same as an arbitrary price level. It's a set of circumstances that have been predetermined.

Lawrence Evans

Correct. Ex-ante I presume.

Justin Thomson

Ex ante. Let's, let's move this on to attitude to risk. And we've been exploring together the idea of a risk compass. Where, where, where you can map risk in not just one dimension, a straight scale, but in two dimensions. And I think what's interesting and what I've learned from you is that asking the question, what is your attitude to risk on a ten scale? The num, the right answer could be any of those numbers, is just how you understand your own attitude for risk and how you show up to be the best with your own risk persona.

Lawrence Evans

Spot on. When discussing risk perhaps, let's set the scene as to what we mean. In investing, I believe there are two types of risk. There, there is objective risk, which is, you know, we get on a plane and we know the objective risk of that plane getting into trouble, and fortunately it's a very low probability. And the markets understand objective risk by the term ‘volatility’, which is fine. However, there's another kind of risk which is less thought about, which is subjective risk. And subjective risk is when you and I get on a plane, how do you and I individually feel about the risk of that upcoming flight? That depends on who you are, your experiences, and how you're wired.

Now in the markets, that's not even looked at because it's viewed as too hard, too idiosyncratic, too difficult. But if I was allocating some money to an investor, one of the first questions I'd want to know was that when risk, which is a link to our personality which is broadly fully formed perhaps when we reach adulthood, is the person opposite me that I'm going to allocate a lot of money to, what is their default center of gravity from a risk taking perspective? Is it to invest to win primarily, or is it invest not to lose? And what's the test I use, which is a psychometric assessment from a UK based company, called Psychological Consulting is, called the Risk Type Compass. That I think it helps people position themselves, if you like, on a compass or clockface, to better understand that there's no right or wrong risk disposition in an individual, and you can be a great investor in any of the locations. But what I found is you can't really optimize your potential until you understand your location on that compass. And I think a lot of people talk about diversity in investing, and rightly so, but they miss one of the most important kinds of diversity, which is risk diversity in investing teams, which would indicate multiple different diverse locations of a team on a compass. Not all clustered perhaps in the risk type of the boss.

Justin Thomson

The world of investing is changing, as it is for most knowledge-based businesses with the advent of artificial intelligence and accelerating with generative AI. From your perspective, Lawrence, what changes and what stays the same?

Lawrence Evans

I think AI enormously helps with knowledge acquisition. I don't think I yet see with AI in any sense that it enhances active investing competence, yet. Knowledge is not competence. And being from the southern areas of France, I was explained the other day that, having embarrassingly quite a lot of olive trees where I live in Provence, that an olive was not in fact a vegetable, it was a fruit. I had assumed it was a vegetable. But knowledge is knowing that it's a fruit. Competence is not putting it in a fruit salad. And I think AI will transform a lot of the knowledge function of the job of analysts and PMs. It will also transform the pattern recognition in, and it being able to analyze a lot of the outcomes one has. And helping as part of a journal and a feedback loop that I advocate, that perhaps the rules of your strategy might need updating, or amending, or tweaking. And I think the pattern recognition of AI could transform the, the efficacy of that and the speed of that. But in the end, I think the importance of the human investor leveraging AI is still there, will still be very important for years to come, but will require a major shift that the investor has to understand who they are, genuinely. Not what they know, but who they are. And I think a lot of investors aren't yet aware of that shift that's coming.

Justin Thomson

I'm going to play hunter turned gamekeeper here Lawrence. So as the game, so to speak, is changing, how are you adapting what you, what you are doing? How are you adapting how you coach?

Lawrence Evans

That's a very good question. So, I'm not, head in the sand on AI. I realize that AI is going to transform every industry, and I'm not immune to that. But what I've been exploring recently is how, for example, in what I advocate, which is the feedback loops to help an investor understand, was I right for the right reasons on an investment, or was I right for the wrong reasons? When I call that journaling. How can I help an investor set up their own journal and make it authentic to who they are and personalize it at the outset, but then you then, give them a tool which could be called software, which almost allows them to have a coach on their shoulder on an ongoing basis.

Justin Thomson

Okay. Trust. I know you talk a lot about trust. The more knowledge gets commoditized, the greater impact that trust with clients will have. And we know that trust with clients is the best way to both raise and retain assets. So, my question to you is, what are the three things that investors should communicate to clients to earn their trust?

Lawrence Evans

Number one, number two, and number three are all the same thing. And in my humble opinion, that is that one needs to communicate the authenticity and validity and uniqueness and differentiated ness of what it is you believe is inefficient in the markets you’re charged to look at. And I don't mean generally inefficient, that we look for undervalued securities using a deep-dive team-based approach with our 36 years of combined experience to exploit the market's behavioral financial biases. No, that's boring. That's non differentiated, non-unique. What I talk about is an investment philosophy whereby you specifically highlight what you believe is inefficient and mispriced in your world, and the more specific you can be the better, giving examples in the past how that has happened and you've exploited that.

But where trust happens is when you connect that specific inefficiency to your personality of who you are, and what you're good at, and what you're less good at. And give the asset owner the confidence that you have the natural strengths to be able to exploit the specific inefficiency that you have just specifically mentioned. That connection I call edge, that connection I call a true, differentiated, authentic philosophy. And I believe that generates trust. I believe that generates loyalty, and I believe it does even when short-term returns, influenced by both luck and skill, are challenging.

Justin Thomson

A lot to digest and, and, and work on there. As we draw this conversation to a close, I hope that listeners to The Angle, we're not just satisfying their curiosity, we're giving them some actionable insights to take away and practice. Start practicing tomorrow. So practice, practice, practice. Tell us about your routine Lawrence, to become better on a daily basis.

Lawrence Evans

So as an investor, I think what's interesting is, and maybe your listeners would reflect on this, to get to world number one, in any performance vertical, you have to do a minimum of two things. One is you have to compete. That's universally accepted in all sports performance verticals, including asset management. The second non-negotiable is you have to practice, to have a chance to be world number one. There are no exceptions in the world of people that do not practice that have achieved world number one status. And yet, investing seems to think of itself as the outlier that, frankly, needs to compete all the time, but doesn't actually need to show how they practice. And I think that's a flaw, a structural flaw.

And so, what I advocate investors do is explicitly practice. So what is practice? I believe practice is having feedback as mentioned on perhaps a postmortem. Was I right for the right reasons? Was I right for the wrong reasons? And I think one of the most efficient ways to do that is with the very dull sounding term of investment journaling. But the problem is most people don't know how to write an investment journal. And I agree, it's not necessarily just free writing on anything you think about. It's not a diary. It needs to be structured. And, for your listeners, I think the best way or the easiest way to start this week might be, you come in in the morning, you monitor what's happened in your universe of names, or your portfolio, and anything that's moved a lot, you write in the morning down in your journal. I need to research and react to why, perhaps I need to understand better what has moved this investment. It could be noise, it could be randomness. But I think they need to at least do some work to understand if anything's changed fundamentally.

And secondly, and perhaps more importantly, as opposed to reactive research, they need to task themselves with what do I need to specifically understand better today. What do I want to understand better about anything that interests me in my investing world. But you're limited to a maximum of two specific things a day, and you set yourself up with targeted research. You then do your day. You get to the end of the day and every day you then have to do a post-day conclusion, which is write up what did I learn today about those two pieces of insight. Write them up, be honest, and compound it every single day of your investing career. And it is amazing how that evolves and becomes perhaps the single most powerful thing an investor does.

Justin Thomson

Okay, you mentioned The Loser's Game, one other book that has been most influential to you, and what other resources will you point to as coaching aids?

Lawrence Evans

I would completely advocate the book The Checklist Manifesto by Atul Gawande. It's how the humble checklist has, and does outsource complexity, in many areas of professional life. And how it's not about demeaning oneself to use a humble checklist, it's about outsourcing complexity to something that your assumptions are broken down into bite size, maximum one-page checklists to help you make better decisions. I'd recommend, one of my favorite ever books is a book written five or six years ago called Shoe Dog. It was by Phil Knight of Nike, and it was all about how you need to put, you need to be positioned differently, you need to be positioned philosophically differently, positioned uniquely. And the whole game is about survival. The whole game is about resilience. The whole game is about understanding that you might have little losers, but don't have big losers. And, it obviously wasn't a book written about investing. But I think to your listeners it might be worth revisiting Shoe Dog, I think it was a fantastic piece of work.

Justin Thomson

Lawrence. Thank you. Thank you. On behalf of our listeners for, at the very least, making them feel, think about something they hadn't already. And perhaps moving them forward in improving their investment process and their investment outcomes. It has been a pleasure. Thank you Lawrence.

Lawrence Evans

Thank you Justin.

Justin Thomson

And thank you for listening to The Angle. We look forward to your company on future episodes. You can find more information about this and other topics on our website. Please rate and subscribe wherever you get your podcasts.

The Angle. Better questions, better insights. Only from T Rowe Price.

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This podcast episode was recorded in March of 2026 and is for general information and educational purposes only.  Outside of the United States, it is for investment professional use only.  It is not intended to be used by persons in jurisdictions which prohibit or restrict distribution of the material herein. 

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