One of the things I grapple with everyday is making wise decisions in the face of uncertainty. More specifically assigning probabilities to the possible outcomes. No doubt I will grapple with this until the day I die. A wise man told me on email the other day that this is the lot of our life as investors. Thanks Peter.
The future does not exist it is a range of possible outcomes, there is no destined outcome. What seems obvious in hindsight is only obvious as we can cherry pick the reasons and ignore the other possible outcomes that never happened.
Imagine you are an investor in Russia in the early 1900’s. Things were going great, it was outperforming the US prior to WW1. The market was closed in 1914 due to WW1 and then briefly reopened in early 1917 where it sold off initially and then rallied into March 1917. After the revolution that month all equity went to zero. It may seem obvious to us in hindsight but at the time it was not obvious. There was no clue in the chart below what was about to happen. That red line in the chart went from 450 to 0 overnight.
Jeff Bezos in the Amazon 2016 Shareholder letter gave a great insight into his decision making process when faced with uncertainty:
..most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow.
Bezos has no sunk costs in decision making. Changing a bad decision is less costly than not changing a decision especially if you do not want to change as you do not want to lose face.
Plus, either way, you need to be good at quickly recognizing and correcting bad decisions
But what do we do when we have less than 70% of information? In some cases we might have only 20% or 40%, sometimes less.
How do we react mentally with this level of uncertainty? What are our biases? Robert Cialdini’s book Influence: The Psychology of Persuasion gives us some great clues as it delves into a few concepts about how our actions can be influenced by certain signals. The key ones he writes about are reciprocation, scarcity, social proof, authority and consistency bias.
All of these “weapons of influence” as he calls them are enhanced under different conditions. One condition which plays an enhancing role is Uncertainty. Cialdini writes in the face of uncertainty we look to the actions of others ie Social proof:
In general when we are unsure of ourselves, when the situation is unclear or ambiguous, when uncertainty reigns, we are most likely to look to and accept the actions of others as correct.
In the process of examining the reactions of other people to resolve our uncertainty, however, we are likely to overlook a subtle but important fact. Those people are probably examining the social evidence too.
When faced with uncertainty we will also look to authority as well to give us clues as to what our actions should be. We will look to management, we will look to the person who seems to have the most credibility to guide us to our decisions. We look to “experts” for guidance.
Getswift (GSW) announcements are vague and ambiguous. They lack details and when there are details they typically reference large potential markets and huge revenue market potential.
There is so much uncertainty with their announcements that the range of possible outcomes are vast. With this level of uncertainty we are susceptible to all sorts of biases and weapons of influence. Getwsift (GSW) seems to be leveraging these weapons well. Whether it is by design or by accident who can tell.
So we will look to authority. Bane Hunter certainly exudes confidence and authority. Challenge him at your peril. GSW have some big name shareholders on the registry like IFM, Regal and Thorney. So these guys have done their homework and are not stupid. Mind you their entry is $0.80 not >$3.
We will look to social proof. The price rallied on the announcement so it must be the real deal, why else would other people be buying?
However with my investment style I can not reconcile anyway of assessing the possible outcomes and assigning probabilities to these outcomes. The dispersion of results are so large and carry so much uncertainty.
In the latest announcement GSW can not even determine themselves the number or value of this contract with Amazon, so as an investor how on earth can I? How on earth can anyone without pure speculation?
But one thing I am 100% sure of, whatever the outcome the answer will be obvious in hindsight.
If this turns out to be another Davnet then the markers and reasons will be obvious. Management hubris, vague announcements, hinting at the potential of being taken over, threatening legal action on short sellers, aggressive and us/against them management style, limited cashflow, non-existence development budget, key staff resignations etc.
If it turns out to be a success then people will point to the large announcements that were made and it was obvious the company was going to be a success.
A final thought is from Richard Peterson’s book Inside the Investor’s Brain which takes a lot from Kahneman’s work. It’s possible that the deals GSW have done will pan out successful but is it probable?:
When an outcome is possible but not probable, people tend to overestimate its chances of occurring. This is called the possibility effect… Emotions in uncertain or risky situations are more sensitive to the possibility rather than the probability of strong consequences, contributing to the over weighting of very small probabilities.
Time well tell. If I only I had a time machine to find out how this will pan out, but nah, it is going to be more fun to see this unfold in real time.