Let me paint you a scenario. Imagine this, when Pat was new to investing in private companies, back in 2008, the first investment closed on February 29th. It happened to be a Friday. After a few years, and in-spite of the financial crisis, that investment returned 100x. Congratulations Pat! Outstanding performance for a new investor with limited experience. In subsequent years Pat’s investments have not fared so well though, while there have been 2x and 3x returns on occasion, most of the companies have failed. What does Pat learn from these experiences? Is the take away to wait until 2036 to close the next investment, when February 29th is on a Friday again?
While this may be a contrived scenario it does illustrate a larger point of which I am sure you can find examples in your own life. We all establish biases, conscious and unconscious, over the course of our careers based on our experiences and, importantly, our interpretation of those experiences – the casualty relationship. These experiences lead to the development of “pattern recognition”, our view of what makes, or breaks, a good investment opportunity. In short, biases are the foundation of our intuition when making investment decisions.
Following our intuitions is more natural, and somewhat more pleasant, than acting against them. – Thinking Fast and Slow by Daniel Kahneman
Given the emphasis placed on intuition when making investment decisions, it is important to explicitly declare your biases ( that’s why we built our platform ). Stating the criteria upon which decisions are made empowers you to determine which biases benefit your investment decisions, which are irrelevant, and which negatively impact them.
Osparna believes that applying a consistent criteria to the investment decision process is an approach to managing biases and reducing the influence of irrelevant biases. The process of weighing criteria and rating an investment opportunity against them makes explicit the aspects of a deal that are important to you. By combining this approach with the ability to look back at outcomes based on the deals you decided to do, and those you passed on, we believe your investment outcomes will improve.
Contact us to learn how Osparna can help you manage your biases.