The Spicy Food Bias
"Most of the mistakes in thinking are inadequacies of perception rather than mistakes of logic."
-Edward de Bono
Time to Reflect on The Spicy Food Bias
To help pay my way through college I worked as a server at P.F. Chang’s. This is where I discovered the Spicy Food Bias:
Me: “Great! Just so you know…that one is pretty spicy.”
Restaurant guest: “It’ll be fine. I had this dish in Arizona a few years ago and loved it!”
Guest, ten minutes later: “I’m so sorry, but I don’t remember this being so spicy; can I have something else?”
While the spicy food bias is something I made up for this post the restaurant guest did fall victim to a very real bias known as availability bias, discovered by Nobel Prize winning psychologists Daniel Kahneman and Amos Tversky. These two psychologists were also the subject of the Michael Lewis’ book (author of Money Ball and The Big Short) The Undoing Project.
From The Undoing Project:
The more easily people can call some scenario to mind— the more available it is to them— the more probable they find it to be. Any fact or incident that was especially vivid, or recent, or common—or anything that happened to preoccupy a person—was likely to be recalled with special ease, and so be disproportionately weighted in any judgment. Danny [Kahneman] and Amos [Tversky] had noticed how oddly, and often unreliably, their own minds recalculated the odds, in light of some recent or memorable experience.
People can easily recall if they liked a spicy dish; however, it’s much harder to recall other information in the moment. The guest may have been caught off-guard because he did not consider that his diet preferences had shifted toward more mild-tasting food since he last ate the Beef Szechuan. While the Spicy Food Bias impacts us in limited – and sometimes comical – ways, the availability bias is much more problematic for investors:
Also from The Undoing Project:
But these stories people told themselves were biased by the availability of the material used to construct them. “Images of the future are shaped by experience of the past,” they wrote, turning on its head Santayana’s famous lines about the importance of history: Those who cannot remember the past are condemned to repeat it. What people remember about the past, they suggested, is likely to warp their judgment of the future. “We often decide that an outcome is extremely unlikely or impossible, because we are unable to imagine any chain of events that could cause it to occur. The defect, often, is in our imagination.
Mild Markets - Spicy Shocks
For investors, it’s very important to detect how the availability bias may influence a decision ahead of time. An important and helpful way to do so is to have a sense of how the market has behaved in the recent past (historical examples of investors letting this bias get the best of the situation can be found here). In the beginning of 2018, that means having an awareness that:
2017 was one of the best years in history for risk-adjusted returns on a diversified portfolio going back to 1960 (60% S&P/40% ten-year US treasury bonds)
Balanced equity and bond portfolios (using the S&P and ten-year treasury bonds) have just gone through their longest period ever of negative correlation on a rolling five-year basis (Note: negative correlation is a good thing that is not always available, it provides for more diversification benefits)
We have had an eight-year bull market, tied for the longest bull market in history
The S&P has now gone the most days in history without a 5% pullback
By understanding how these aspects can influence us, investors will be better prepared to order a portfolio off the menu that their investment palate can truly stick with!