Decision making is a complicated endeavour. It basically involves trying to divine the future, and make a call on what the best strategy based upon uncertain outcomes. That’s never easy, particularly when we want to make the right decision. The one that will play out the way that we want it to. Short of a crystal ball or a psychic connection to the underworld, there are no guarantees.
One of the decisions that people particularly care about is their investments. We want them to grow. Ideally, we want them to grow a lot. And we would prefer that they never actually shrink. ‘Smart money’ has always advised that investing needs to be done with a long-term view. The thinking is that, over time, upward progress is pretty inevitable. This strategy basically requires not looking at the daily ebb and flow (and occasional cliff dives) of individual stocks or the market as a whole, and accept that over quarters, years and decades the amount in your investment account will increase.
At the same time, it should be relatively apparent to the casual observer that the stock market is an inordinately fickle beast. And quite often a downright irrational one. Individual stocks and commodity prices move up and down for the most inconsequential and tangential of reasons. A border skirmish in a desert nation on Wednesday sends the price of oil up enough to produce 10 cent hikes in gas at the pumps on Friday.
Did oil actually become more expensive to produce? Did the petro-giants so completely run out of gas in 24 hours that it cost them more to produce the stuff they are selling today? No. Absolutely not. What happened is that a few people got anxious, and more people got exercised that the first lot were anxious, and that caused others to became downright concerned. People didn’t like other people looking cross, and so they started getting very worried indeed. The end result is that a lot of theoretically knowledgeable, inordinately well-paid people that drive far nicer cars than you or I all of a sudden started running around and screaming that the sky is falling.
This particular drama plays out daily. To watch the market, you would think that no one is capable of thinking for themselves. Decision making in this context appears to operate on the same essential principles that it did in the schoolyard in grade five. Popularity is decided by, well, popularity. The consequence is that decisions are not made rationally based upon facts, but emotionally, and largely based upon what other people are thinking and doing, or speculation on what other people might do. In particular, decisions are made based upon picking the option that seems most likely to gain popular approval.
Take the events of this week as an illustration. Carl Icahn, a well heeled and well versed investor worth billions in his own right, tweeted that he had a large position in Apple. And then he tweeted that he had a conversation with Tim Cook, and would like to see Apple using some of its ridiculously large cash hoard to buy back shares. The consequence of those two tweets as a $17 billion increase in Apple shares. For those following at home, that’s a 5 per cent increase in the value of the stock.
What is important about this is two things. Firstly, the fundamentals didn’t change. Apple didn’t launch a new product. Their sales have not changed. No partnerships were revealed. No executives were fired. No decisions are announced and no new strategies were undertaken. They were exactly the same company at 2:20pm on 13 August that they were at 2:25pm. And yet, their valuation had just jumped significantly. This leads to the second point: because an influential person who works on Wall St. confirmed that they liked Apple and hoped it would do something (and this is not news; they’ve been talking about it for months) everyone else decided that they liked Apple, too. The same behaviour occurs when the cool kids anoint a new member of their tribe. For the same completely irrational and intangible reasons.
The lesson for decision making is this: following the crowd isn’t making a decision. It’s choosing to let other people decide for you. Going along with the popular consensus is, largely, deciding not to decide. You’re outsourcing your opinion from others to determine on your behalf. The tendency to this behaviour is a problem in the markets, and it is equally a challenge in our own lives. It is easy to do something because we think it will be popular, or it is what others want us to do. It is much more difficult to set out our own path, particularly when it strays from is contrary to popular opinion.
And yet, what has been proven, time and time again, is that it is the unconventional perspective—the contrary view that others have dismissed or ignored—that often leads to real opportunity. Real leadership is about deciding the right thing for the right reasons, not the popular thing because the crowd thinks its a spiffy idea.
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