Do you forget the groceries in the middle of the list?

Hi,

In recent years I have been working on improving my memory.

Working on memory is an upstream fix, meaning very high return on investment across the board as it improves everything else downstream. In the case of memory it improves learning, thinking speed and prevents the annoyance of returning home from grocery shopping and having forgotten to buy olive oil for the third time.

Grocery lists in particular are interesting as many memory exercises can be done around them. There is also a particular group of mental biases related to lists under the name of serial-position effect.

Notice that when we forget items on our grocery list, it tends to be not the first or last items, but the ones in the middle.

This bias can also have various potentially deceiving effects when we analyze investing opportunities.

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The serial-position effect consists in us paying more attention to the initial and final elements when we are dealing with lists. We take the middle ones less seriously.

There are various hypotheses for why we tend to behave this way by default, related to how we focus and how our brains store and retrieve information. I’m more interested in the consequences when we are not aware.

When we look at assets to invest in like stocks, crypto and fiat currency pairs, or ETFs we are basically looking at a series of events in time and trying to guess what future events will be and how to profit from them.

Now imagine this series of events as your shopping list.

Are you confident that you are getting the correct picture and making your best educated guess for the future if your brain is mostly focusing on the initial events and the most recents ones, but not paying much attention to what happened in the middle?

The risk we face is that the meaning we create is different than what it would be otherwise. That we overlook inconsistencies and don’t give them much attention. That we attribute more importance to either the oldest or the most recent events and make our decisions based on those.

A business IPOs or ICOs, we look at the founding team, the mission, the white paper and see a profitable future for it. We look at the price graph and see a positive trend. Now we are excited about having found an opportunity.

What we didn’t see is the jumpiness in the price graph between the share or coin offering date and recent events, discounting and attributing it to broader market effects. The CEO’s misbehaviors and quirkiness we dismiss since the mission is solid and the positive price movement is there, forgetting that culture is one of the main business drivers long term. Insiders have been selling shares, but we are now justifying it as early investors taking profits and rebalancing.

In reality the middle events are the track record. How we do one thing is how we do everything. These events are just as important as the rest.

Luckily for us it is easy to deal with this bias. Simply by being aware, we will pay more attention to the middle of the list. Once we are aware we cannot become unaware.

To a non blurry week ahead.

Have a good one,

Chris

Originally posted 20th November 2023 on ElliottSays.com

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