Contrary to most managers who identify stocks that are likely to succeed, this is a negative role which requires the analyst to be pessimistic about the outlook for stocks selected by the model. Such analysts will eliminate up to 20 per cent of the potential buy-list. Robert Wood, a professor at the Australian Graduate School of Management, says a well-known technique – that few people actually use – is to ask what the possible worst-case scenario is. “Once it has been identified, managers can ask themselves whether they can handle it. It may be difficult to go through this process, but by ignoring the potential pitfalls you may be unnecessarily exposing yourself,” he says. “The worst-case scenario might be that the management could leave, and there’s not much you can do about that. But you could look to see how locked in they are, and either change that or adjust your assessment of the risk accordingly.”

Kahneman says that mangers are likely to understate the probability of unfavourable outcomes. Even though any one of those outcomes might have only a small chance of occurring, in combination they may actually be far more likely to happen than the so-called ‘most likely’ scenario. GMO’s Gray says he knows of a number of successful firms that have hired a “designated bastard” to help out. A person that some organisations may have hired unwittingly, to the chagrin of their colleagues, this person’s main role is find fault with everything. He says: “We had a guy that came in to our Boston office that was quite young and inexperienced,” he says. “There was a model we used, a dividend discount model that had been built and added to over 20 years, and one of the senior partners in the firm saw it as his. This new guy actually stood up in many meetings and tore it to bits, pointed out all sorts of inadequacies and ways it could be done better.

It took an enormous amount of courage; either that or stupidity,” he says. “But the positive side was that it worked, we got a better model out of it. If it hadn’t been for this one guy, I’m not sure anyone else would have done it. I don’t think the industry is structured well enough to be able to take the opposite view and argue a case rationally and clearly.” Considering all the things that can go wrong, Gray says he doesn’t think that there is enough criticism in the funds management industry. “In the academic world if you give a talk, you stand up and say ‘my name is Jack Gray’ and you get 4000 objections.” Ray King, director of Sovereign Investment Research, says the role of ‘designated bastard’ may work best if it is rotated.