First, an update. I did my Value Investing Workshop in Bangalore yesterday, and received an overwhelming reponse…
The upcoming sessions are in Chennai (23rd Sept), Mumbai (30th Sept), and Hyderabad (7th Oct). If you wish to register for any of these, please click here.
Coming to this post, this is the third issue of Outside the Box newsletter, and is authored by my friend Ninad Kunder. Ninad runs a venture in the HR staffing space and manages family money. Shuffling between these two hats has helped him both in business and value investing.
In this post, Ninad talks about how our political mind is a magnet for all kinds of behavioural biases, and how that may impact our investment decision making. Over to Ninad.
To Be Political, Or Not To Be Political, That’s The Question
by Ninad Kunder
If you are reading this post, then you live with the fundamental belief that you are God’s gift to mankind.
Fret not, because so do I. If not God’s ‘greatest’ gift to mankind, at least God’s ‘above-average’ gift to mankind.
Why else would you choose not to traverse the easy path of buying an index fund; but instead choose to match your wits with millions of other above-average God’s gift to mankind denizens?
The alpha in us is wired so deeply that conscious recognition of this trait is of no use curbing our instinct and drive towards proving ourselves to be God’s gift.
This inherent trait is what drives me to the real topic of this post i.e., politics. When Vishal invited me to write for this platform, he had just two restrictions – politics and religion. Hence the post about politics and how it affects our investment decision making. Invert, always invert. 🙂
The ancient Greek statesman Pericles said –
Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.
Unfortunately, the vast majority of us — sufferers of the God’s gift syndrome — take an interest in politics — arm-chair politics, that is and have a view on it. Starting from believing a political philosophy, to hero-worshipping the leader who represents that philosophy.
Groucho Marx said –
Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.
The politician is the ultimate end-product of Darwin’s survival of the fittest test. It is a cut-throat environment where only the best survive, even though we may hold them in poor light. The politician is very adept in rationally exploiting our emotional needs and catering to the baser instincts.
Winston Churchill said –
A politician needs the ability to foretell what is going to happen tomorrow, next week, next month, and next year….and to have the ability afterward to explain why it didn’t happen.
It is amazing that rational people assume that leaders take rational decisions fully aware that they cater to our emotional responses.
Our political mind is a magnet for all kinds of behavioural biases. Starting from authority bias, assigning superhuman capabilities to our leaders, to confirmation bias, given that the human mind, like an egg once impregnated, shuts down to all data points that may be contrary to the idea that has taken root.
Commitment bias sets in and even though facts change, on political issues, people seldom change their minds. There is enough research which shows that when faced with contrary data points on political positions, people double down on their stated position and become even more rigid in their stand. The stronger the inherent bias, the more one is likely to perceive bias in the other view.
Put two people with opposite views for a discussion and lightsabers come ratting out, with the strong belief that the force is with them and they are battling the dark side.
A significant chunk of our political view is molded during the upbringing process by the political views shared by our family, community and the ecosystem around us. We have also migrated off late to an environment of easy access to cozy cocoons of concurring thoughts across social and mainstream media. Vast oceans of groupthink paradise.
So what does all this have to do with investing?
Consider Political Bias, which originates out of our political ideology and clouds our reading of the economic environment and the actions we take as a result.
Based on whether we support or oppose a ruling dispensation or leader, our political view seeps into our investing outlook – either in favour of the leader, with the notion that nothing can go wrong in the environment or the leader’s actions; or the opposite view where nothing can go right.
This could be a market-wide phenomenon and we see wide gyrations in the market when a political event takes place. There is, of course, an element of Soros’ reflexivity that could creep in, where facts move to meet perception. However, there is a risk of Excel extrapolation that sets in with either positive or negative bias.
History has shown that markets have continued to perform irrespective of the nature of the political dispensation and some of the best returns have come in uncertain political environments.
Our political views, which are the end product of an emotional process, get super-imposed on investing which is supposed to be a rational process.
Therein lies the risk.
As Deng Xiaoping said –
It doesn’t matter whether a cat is black or white, as long as it catches mice.