Thursday, April 2, 2015

How can consistency & commitment be bad for the investor?

Consistency and commitment are supposed to be virtues in society. When you take a stance after researching it thoroughly it becomes very difficult for you to see the other side of the picture. This is also stated as resistance to change in management folklore. When the added pressure of public disclosure of the stance is present very few people have the capability to change the stance.

This is the basis for Mohnish Pabrai saying that he does not like to talk about current positions and if he were wrong he would like to be wrong in private rather than in public. In my opinion he is not being egotistical but trying to make it easier to avoid the consistency and commitment bias. It is also probably the reason that Buffet in the Berkshire letters to shareholders often spends several pages discussing the mistakes made. By doing so he avoids speculation and ridicule that might reinforce the consistency and commitment bias and from a public relations perspective builds his brand of leadership among his followers (and garners more in the process).

The best way to avoid this is to not discuss current investments with anyone. Only when you need to clear out your thoughts you can maybe discuss your opinions before making the investment or if you are thinking of exiting.