Everywhere you look
Once you look for feedback loops you see them everywhere. And once you realize how powerful they can be you start to answer some of the most frequent questions in business and investing.
Capital Thinking · Issue #773 · View online
I want to try to explain why GameStop went up 100-fold in the last year and why Sears never recovered. They have to do with the same force in opposite directions.
It’s a force that can explain a lot of baffling trends lately, and it’s so easy to underestimate and overlook.
Why It’s Usually Crazier Than You Expect
Morgan Housel | The Collaborative Fund Blog:
First, a story about why some animals go extinct faster than people expect.
Forecasting when a species might go extinct is hard because whatever is causing a species to die off rarely progresses at the same rate. It can speed up in the blink of an eye in ways that surprise people.
Two researchers wrote a paper a few years ago explaining why.
Say an elephant is being hunted for its tusk. The rate of hunting often massively speeds up over time, cascading into a frenzy that pushes a mildly at-risk species into quick extinction.
It’s simple: As the number of elephants declines, tusks become rare. Rarity pushes prices up. High prices make hunters excited about how much money they can make if they find an elephant. So they work overtime.
Then fewer elephants remain, tusk prices rise even more, more hunters catch on, they work triple-time, on and on until the number of hunters explodes as everyone chases the last herd of elephants whose super-rare tusks are suddenly worth a fortune.
Forecasting models that don’t appreciate how frantic the last-minute hunt can become “give a false sense of security when managing large harvested populations,” the researchers wrote. A species’ endangerment starts slow, then picks up, gets a little faster, then boom … spirals into a disaster seemingly overnight.
Supply and demand are intuitive; realizing how quickly supply and demand can go from linear to exponential is not.
Feedback loops – where one event fuels the next – often lead to that kind of bewilderment.
Find a feedback loop and you will find people who underestimate how crazy prices can get, how famous a person can become, how hard it can be to change people’s minds, how irreparable a reputation can be, and how tiny events can compound into something huge.
They take small trends and turn them into big trends with unforeseen momentum. And they happen in every field.
If you become a good reader as a child, reading is fun. When reading is fun you do it more. When you do it more you become a better reader – on and on.
The opposite is true: delayed reading ability can make reading feel like work, which can cause kids to read less, which delays reading comprehension even more.When it doesn’t rain, there’s less evaporation, which makes the air drier, which reduces rainfall, on and on.
And, of course, feedback loops can do astounding things in business and investing.
Morgan Housel
*Featured post photo credit: Tengyart on Unsplash