Latticework and Venture Capital, Chapter 5— Psychology
Note: This is the sixth post in a series on Robert Hagstrom’s Latticework and VC. Chapter summaries are in no way designed to be Cliff Notes on the chapters of the book, quite the contrary, please read the book for yourself!
Hagstrom leans heavily on Graham and “Mr. Market” in this chapter. A fair amount of William James as well.
Fischer Black — Speech entitled “Noise” to the American Finance in 1986 where he publicly stated the market is irrational and that, above all else, noise surrounds, penetrates and defines prices. It’s up to the insightful investor to pierce through the noise.
This chapter led me to read this post by Michael Mauboussin.
Helluva accompanying graphic:
As well, one must check out Shannon’s Mathematical Theory of Communication.
- An information source — stock market
- A transmitter — reporter, company management, money manager
- a channel — blog, tv, twitter
- The Receiver — The human mind.
- The Destination — ultimate decision that a given individual makes
Obvious problems occur when there is interference or noise during delivery over the channel or upon reception.
Mr. Conference — Impending crowd delusion can be extrapolated from a careful analysis of conference topics, breakout sessions and ‘startup alleys’. The conference sessions then result in an excess of content generation around said topics, usually resulting in many VCs needing exposure to these emerging verticals in order to not ‘miss the boat’ during discussions with their LPs.
This is not to say that value is illusory within many of these foci, only that overvalue is sure to arrive.
- Know the difference between price and influence. Prices can be an extension or expression of influence in times of extremity.
- The riot threshold. Sometimes it’s not bad to be the first guy to throw the rock. What you never want to be is the last guy to throw the rock.