What Rabbits Can Teach You About Investing
Earlier this week while I was taking a walk in the field behind my home, I came across two rabbits eating grass. They were very close to each other and both were equally close to a brush pile. As I begin to walk past them, one sprinted into the nearby brush pile while the other stayed frozen in place. At that moment, I witnessed both flight and freeze responses.
Rabbits are like furry calculators that rely on instinct to determine what they should do to receive the most favorable outcome, which is to survive an attack from a predator. Each rabbit came up with a separate answer to this problem, one ran away and the other froze.
If I were a predator and did eat the rabbit that froze, did that rabbit make a bad decision or just get unlucky? Natural selection has a bias towards the outcomes that result in survival. The rabbit who can survive the longest will have the most offspring and those offspring will carry on the same traits as their parents.
Survivorship Bias in Investing
This bias towards survival exists in investing as well. We tend to look at only the successful companies and investors. We ignore the luck involved and chalk it up to skill. This business natural selection process chooses which traits appear to be successful in the past environment. It does not take into consideration the countless number of competitors that failed during this process or account for the uncertainty the future brings. Quite often, poor decisions that work out become good decisions in hindsight. The decision-making process is rarely considered.
Did the rabbit who froze make a bad decision or just have bad luck? The rabbit’s brain must have determined inaction had the best rate of survival given what it knew at the time.
Making Better Decisions
People tend not to take personal accountability for their own mistakes. This stunts their ability to move forward in learning how to become more successful. We tend to judge our decisions based on the results. If it’s a bad outcome, we assume it was a bad decision and vice versa. We ignore how much luck plays a role in the equation.
In investing, you must make decisions based on incomplete facts. You must embrace the uncertainty and estimate the probability of various outcomes. We should have humility and take mistakes in stride. When things go wrong don’t blame others. Instead, analyze your approach and learn from your mistakes. This approach helps improve decision-making going forward.
We must recognize the uncertainty inherent in life, understand our own behavior and biases and learn from them. It can also be prudent to seek unbiased advice to test your logic and get feedback when you are making decisions in a field that is not within your personal expertise.
Which path will you choose?
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