Weekly Insider (Incrementalism & Cascading Snapshots)

The one thing I know: ‘nobody knows nothing’. Consider this: eighteen point two: 18.2% that is. This is the difference in earnings estimates made in January and revised in July for how much second quarter earnings growth would be. New Year, new estimates, same biases and errors. And so on January 1st, forecasts of growth in earnings for the second quarter of this year were for 4.7% for S&P 500. Three months later, passing through the guesswork guillotine, it was -2.0%. And earlier this week, estimates emaciated to -13.5%. How can so many, be so wrong, about so much, so often?



One answer: anchoring and adjustment. Where we start matters where we finish. It’s also the fallacy of incrementalism, which I define as the accumulation of small changes for fear of committing a large error in lieu of accepting large changes and settling for small error. It’s the Inverse Armstrong (ie. Neil): One small step for…equity analysts, is one giant leap…off a cliff for those who follow their work.



Expectations matter. And you can be sure that coming out of this down cycle (I won’t gander a guess), analysts will underestimate earnings growth. Clustering or sticking with the herd is safe. Invoking Keynes, ‘it’s far better to fail conventionally than to succeed unconventionally.



Here’s another serious bias: not invented here aka NIH syndrome. I don’t mean ideas in big corporations--though that’s true, what I mean is much bigger.



What I mean is this: we attribute our own reactions to environments (which are often unstable) or situations outside our control. Meanwhile we attribute the reactions of other people to their disposition (presumed to be stable). Consider this: if a candidate for a job shows up late to an interview, we instinctively blame them for irresponsibility. If it were us in the same situation we might blame the excessive traffic or parade or whatever exogenous and unexpected circumstance impedes us.



So why is this? It’s obvious. We look outward because, well—we look outward. It’s true biologically that it’s easy to observe others and quite hard, without a mirror, to observe ourselves. It’s the same reason we find it easy to understand what we’re feeling but find it much harder to know what someone else is really feeling. We judge others by seeing, ourselves by feeling.



So what’s the lesson? More understanding means less conflict.



Recently, researchers at Princeton broke it down like this: there are positive illusions. We view ourselves more likely to get rich and less likely to get sick than others. Why? Because we know our own wants, not others’. When people negotiate, they see what you say and do, but they don’t really know or feel your motive—even if it’s actually in their best interest.



Another researcher offered a fascinating view that people are just successions of overlapping selves through times. I call it cascading snapshots. This implies people treat themselves as different people: past, present and future. I think of it like a call option or a put option on experience. You might spend money on present self instead of saving for future self (whose state you can envision but not experience)--the same with painful surgery--preferring to "put" it (off) to future you. You treat future you as a different person--whose feelings you can't feel.



Dan Gilbert of Harvard has shown temporal hyperbolic discounting--we choose pleasure today and defer pain to tomorrow. We hyperbolically discount a $1.00 today versus $1.50 tomorrow, but the opposite a year from now. When asked to drink a nasty concoction to benefit science (they were told the more they drank the better) they picked two tablespoons now, but when deciding how much to drink in the future, they picked a half cup--the same they prescribed now for a friend. It’s as if the future them is the same as a current non-them (a friend).



When we imagine ourselves in the future-most of us zoom out and imagine a movie of us acting external to us(like an out of body experience)



We view ourselves as objective and others as distorted by bias. We view ourselves on our good intentions and others on their bad behavior. This makes us angry, frustrated and apt to think others are unfair or unreasonable, which in turn leads to aggression, conflict, disagreement and misunderstanding.



The truth is this: mistakes and errors from others could be the result of unintended influences. The researchers advise remembering “there's a wide gulf between intention and action The whole passage, “This picture may sound dismal, but there is hope. Misunderstandings can be averted by those aware of the psychological processes involved in self and social perception. Those individuals can be mindful that it is not only their own behavior that is sensitive to the constraints of the situation, but others' as well. Perhaps this could prompt them to show more charity when others fail to meet expectations. Those individuals also can recognize that others' mistakes and errors may not be the result of conscious malice but rather of unintended influences that those others would themselves decry. And, those individuals might remind themselves that there often is a wide gulf between intention and action, but that it is only reasonable and fair to apply the same standard of judgment to others as to oneself. Following these guidelines would not just be socially charitable— it would also be scientifically informed.”



And I advise that one should act intelligently when confronted with (seemingly) unintelligent behavior.