3 Meaningful Lessons From Finance for Product Managers

Should product managers be great financiers in their work? Perhaps, the highest level and absolute knowledge are not required. However, this area should be a scheduled point on the way to the proficiency and effective product management.

The owner and author of sachinrekhi.com in his article shared some essential lessons he learned from finance. The highlights are right here:

The important finance principles that can be used day-to-day product management practice

Finding the arbitrage opportunity

One of the concepts regarding trading is finding arbitrage opportunities. An arbitrage is basically buying low in one market and simultaneously selling higher in another, profiting from a temporary difference.

We often talk about how in growth you can’t simply re-use a list of tactics for your own product because the channels are constantly becoming saturated, over-run, and thus less effective. Tht’s why you need to be constantly scouring for new growth opportunities and determining whether an arbitrage opportunity continues to exist. For a SaaS business, this may be specifically determining whether you can acquire a customer at a cost of acquisition.

But more broadly, it’s important to leverage this mindset for all businesses. When evaluating a channel, how saturated is it? Are there many folks already exploiting the channel? Does the arbitrage opportunity remain?

Leveraging modern portfolio theory

The modern portfolio theory in investment management states that an investor can construct a diverse portfolio to maximize expected return based on a given level of acceptable market risk.

While diversification can help mitigates risk, it comes at the cost of expected return. Risk and return are directly correlated.

Assessing performance

The difficulty of assessing an investment based on past performance is rather complex and relevant issue.

We often talk about the hot hand fallacy, which is the false belief that someone who has achieved success with a seemingly random event has a greater chance of future success. Yet this remains what we are effectively doing when judging future performance based on past performance. And while we’ve countlessly shown what’s wrong with this approach, we continue to leverage it as the main mechanism for evaluating fund performance.

The approach that is to evaluate fund performance on whether it outperformed based on executing faithfully on an a priori stated strategy and whether the outperformance was specifically driven by that stated strategy.

If this is true, then those funds that do outperform in this way do most often see repeated success. As in then, past performance does become indicative of future performance. The challenge from an investment perspective is it is almost impossible to get this level of data and insight that you would need to evaluate based on this approach.