The Sunk Cost Fallacy

We are hardly rational about sunk costs; traders hold “paper losses” while entrepreneurs let incurred costs affect their current decision making. In reality, paper losses are as real as actual losses; however, traders hang on to losing positions hoping that it will somehow turnaround and their paper losses would magically disappear. This is as good as a gambler, on losing once, bets bigger and bigger stakes in hope of covering his losses.

Entrepreneurs, on the other hand, often let imprudent investment decisions come back to haunt them. It could be a failed marketing plan, it could be a failed merger decision, or it could be a failed hire. Instead of moving on and learning from their mistake, entrepreneurs try to salvage the losses, and end up sinking in more resources when they could be channeling the resources to more productive use.

Sunk cost would be better termed as lost cost.

The Perfect Launch

Many startups have this burning need for a perfect launch. No, the front page is not perfect. No, the viral features are not built in yet. Oh no, we do not have the complete feature sets yet. If only Microsoft has this respect for the perfect launch. There would be no Office (ever), there will be no Windows (ever ever ever & ever), and of course, there will probably be no Microsoft. While the software Goliaths of today never had any qualms about launching an imperfect product and patching it up again and again, taking in user feedback (yes, even Microsoft!) to perfect their product, many startups often take the other approach of delaying their launch date day after day after day while the team gets into their own illusionary world of what works and does not.

Launch early, get feedback, and adapt as no one can predict consumer behavior or demand.

Oh oh.. Another ETF!

Catch the latest financial fad! Tulips! Internet stocks! CDOs! and.. the latest instrument for your financial delight: ETFs!

ETFs or exchange traded funds tracks indexes and allow investors to buy and sell in small units, just like stocks, to facilitate liquidity and access. Sophisticated investors can use ETFs to gain a widely diversified exposure or to hedge against positions. For example, FXI can be used for a China long play while FXP can be used for a leveraged China short play.

While ETFs are useful, it has helped fuel a retail based index investing craze and has at least a part to play for the recent feverish commodities prices. ETF issuers are riding on this trend to make fast and risk free money by structuring ETFs to allow investors to bet long, short, double long, double short on any instruments from forex to stocks to commodities. The latest addition is the HK gold etf that longs gold while gold is at a dizzying $900+ level. Go on investors, buy it and set a new record high!

And of course, before the burst of any bubble comes the height of irrational exuberance…

Oil Prices & Structural Changes

With oil prices creeping higher, and assuming demand for energy continues rising while supply of easily accessible oil is reaching a bottleneck, there is growing impetus for structural changes in the global economy. P&G management in a recent FT interview (“Oil costs force P&G to rethink its supply network”, June 27) stated that their transportation cost now exceeds the operating costs of their factories due to energy prices. This causes P&G to contemplate relocating their factories to where the final consumption is, instead of where the labor costs are lowest. Since USA is still the largest consumer country in the world, this global phenomenon might very well lead to some degree of the unwinding of outsourcing in US. Outsourcing and globalization started with the plunge in transport costs and time over the last century fueled by the industrial revolution, enabling companies to locate different parts of their supply chain to wherever it was most cost-efficient. The rising energy prices will cause many countries to consider outsourcing in more dimensions.

Another more obvious structural change in the economy is the adoption of alternative energy sources such as solar and wind power. However, this is ironically harder to accomplish in developed nations such as USA than developing countries such as China. Where infrastructure is already built, a overhaul of the current system would be extremely costly. Also, traditional energy firms have more incentives to guard their dominance in the developed nations through lobbying. However, the adoption of alternative energy is inevitable unless more supplies of oil that are easily extractable are found. Solar power might also prove to be revolutionary for another reason: users are now able to buy access to power, instead of buying units of power.

Trading With The Flow

Short selling is generally considered more risky than taking a long position. While this is true in bullish or consolidating markets, short selling can be less risky in a bear market since the general direction is downwards. Traders such as Timothy Sykes have made their fortunes taking on short positions in bearish markets. In general, trade with the flow: long in a bullish market, short in a bearish one.

Trading is a very different game from investing, and there should not be confusion between the two.

Embrace Randomness

Nassim Nicholas Taleb argued eloquently in his bestseller, The Black Swan, that what hurts you most is the completely unexpected. Accidents such as 9/11 and the Asian Financial Crisis happened completely out of the blue and were the most damaging in history. Many wars were also started by random accidents that escalated.

I would like to argue here that while randomness can be damaging, it can also be extremely rewarding. Most successful startups do not start with their final ideas. Paypal started as a money transfer tool between PDAs with a dream to make a borderless private currency. While it did not become a PDA based money transfer tool, Paypal became the most trusted payment solution online adopted worldwide after discovering that Ebay clients are the most frequent users of their technology and adapted successfully.

What seems to happen randomly usually happen for a reason outside of our knowledge. Human beings will always be subject to randomness due to our inability to find and process infinite information. The key is to be prepared and open to unexpected events and opportunities. For startups this would mean just starting out with an imperfect idea and adapting as opportunities appear. On a personal level, it means being positive and taking on unexpected opportunities as they come, as they may lead to even more opportunities.

Embrace randomness to get ridiculously good outcomes, and hedge to prevent the opposite.

Equity & Psychology

Research shows that human beings will rather suffer from a lose-lose situation than to accept a small gain if someone else will make an “unfair” bigger gain. The definition of “unfair” is of course hard to define, but here we shall loosely refer to “unfair” as getting more than what one paid for. In an example, in a team of 2, if a member did all the work, and he is only given 30% of the rewards, it would be considered that he is unfairly treated. This leads him to prefer not to work at all, leading to a lose-lose scenario where both members get 0% of the reward. This is a form of human illogicality that often lead to suboptimal outcomes in decision making.

Diffusion of Culture

A friend of mine spotted a Caucasian squatting in a comic store in America reading Japanese manga. Will the future be one of a melting pot of cultures? The internet for one has enabled millions across the world to publish their thoughts and share their culture with the rest of the world. As a Singaporean, whose grandparents migrated from China, and who is now living in America, I have seen much similarities in the different countries: the songs people listen to, the books they read… Will this be more prevalent? More interestingly, will the culture of the rising economies (BRIC) spread more readily over the world, causing a multi-way exchange?

Booming economies usually have the most influence culturally on the rest of the world. This has a lot to do with their companies (Apple, Coca Cola, Disney, Paramount Pictures etc) having huge capital bases to help advertise their products across the world. Of course, this goes as well for their media companies. Hollywood movies are screened across the world, often with a pro-America bias. Interestingly, newly developed economies such as Taiwan and Korea are exporting their own culture with artistes such as Jay Chou and Rain, talk shows and dramas. However, these economies were far smaller than America’s. It would be interesting to see whether economies such as China and India, each with a potential to be bigger than America’s economy, will export their cultures even more successfully.

Success

The factors for success is 4 fold:

1. You must have a definite purpose backed by burning desire for its fulfillment

2. A definite plan, expressed in continuous action

3. A mind closed tightly against all negative and discouraging influences

4. A friendly alliance with one or more persons who will encourage one to follow through with both plan and purpose.

There is really nothing in the world that cannot be done. There is no failure, only feedback. The only time a person fails is when he decides it is a lost cause.

Success and failure exists only in the mind of the beholder.