Black Swans and Pink Flamingos: Preparing for the Expected and Unexpected

To be a successful investor you must have a fact-based view of the world and shed biased assumptions and outdated perceptions. Many investors talk about instinct and gut feeling in their decision-making, and wonder what goes wrong when they lose money. Let's talk about some of the things that will help you to critically analyse global development trends based on data.

For investors, having an accurate understanding of the state of the world is crucial in identifying risks and opportunities. By basing analyses on facts rather than generalisation and hype, investors can gain an investment edge.

Let's talk about Instinct. It's not one thing. There are many types of instinct:

Negativity Instinct

Humans tend to have overly negative assumptions of the state of the world, thinking things are worse than they really are. News media exacerbates this by focusing extensively on negative events. Investors are prone to this bias as well. Counter this instinct by analysing comprehensive data on long-term fundamental trends, not just headlines. Examine metrics like poverty levels, disease rates, education levels, and quality of life across regions. This provides a balanced perspective for assessing investment landscapes.

Fear Instinct

Investors often underestimate progress in poorer countries due to persistent negative stereotypes. Rapid development in many emerging markets often gets overlooked. Resist automatically associating developing countries with war, famine and hopelessness. Analyse data to identify emerging markets with fundamentals improving faster than perceptions reflect. This disconnect can signal investment opportunities.

Gap Instinct

Investors tend to divide the world simplistically into developed and developing countries, ignoring differences between countries within those categories. Avoid this oversimplification. Analye countries individually using specific metrics related to your investment goals. Identify outliers defying stereotypes. For example, sub-Saharan Africa contains both rapidly modernising countries and very poor nations. Each should be assessed independently.

The Size Instinct

Investors often misjudge the sizes of populations, economies and market opportunities. Under-appreciating scale can cause missed opportunities. Counter this by studying accurate data on demographics and economic size. For example, many underestimate Africa’s population size and future workforce numbers. Properly assessing scale highlights areas primed for growth.

The Generalisation Instinct

Individual people or events can erroneously be seen as representative of a whole country or culture. Investors stereotype at their peril. Avoid extrapolating limited experiences or singular data points. Due diligence must be wide-ranging and comprehensive. Beware of confirmation bias where data confirming preconceptions gets focused on while contradicting information gets ignored.

The Destiny Instinct

A common assumption is that a country's characteristics are innate or historically predetermined. This outlook underestimates people’s ability to change their future. Avoid cultural or racial determinism. Countries regularly defy supposed destinies. Critical junctures like new leaders or policies can put countries on radically different trajectories not obviously predicted by history or culture. Keep an open mind.

The Single Perspective Instinct

Investors often rely too heavily on single sources of information or advice. This creates skewed perspectives and heightened risk. Actively seek information from multiple diverse sources representing different viewpoints, not just prominent voices everyone listens to. Be skeptical of confident predictions; test them against empirical data. Think independently rather than outsourcing opinions to “experts”.

The Blame Instinct

There is a common instinct to assign blame for failures to individuals, groups or events. Investors blame disasters like financial crises on specific causes. However, outcomes often have multiple complex causes without single origins. Look past faulting individuals to understand systemic factors at play. This provides more insight into risks and future likelihoods than reactive blame.

The Urgency Instinct

Headlines incite urgency, implying immediate action is required. Investors can rush into suboptimal decisions when emotions run high. Beware of manufactured urgency and short-term hysteria. Stay focused on long-term trends and distributions more than outliers. Be patient and wait for quality information rather than reacting hastily. Avoid desperation compromises or crisis mentality.

Scepticism

Cultivating sound skepticism skills helps investors make rational decisions:

• Look for hard evidence over opinions and speculation. Verify via data.
• Check how strong the evidence really is and any limitations. Can it withstand scrutiny?
• Look for signs of confirmation bias or motivated reasoning. Is the presenter objective?
• Evaluate the simplicity vs. complexity of explanations. Avoid oversimplifications.
• Examine breadth: does the explanation apply broadly or only in limited cases?
• Consider alternative explanations. What else could account for the evidence?
• Check if a theory is falsifiable and makes specific predictions. Can it be tested and proven wrong?
• Beware charismatic individuals making bold predictions. Test their track records.
• Analyse precise probabilities over vague terms like “unlikely”. Require numeric estimates.

By honing these types of critical thinking skills, investors can better evaluate risks and opportunities.

Fact-Based Analysis

A 10-step process:

1. Start with an open mind, not preconceptions.
2. Collect wide-ranging quantitative and qualitative data, not just anecdotes.
3. Seek context through broad sources and historic trends.
4. Look for multiple root causes, not simple blame.
5. Identify slow generational shifts, not just headline drama.
6. Let probability guide forecasts, not a possibility. Focus on likelihoods.
7. Acknowledge uncertainty and margins of error in data.
8. Update views as new facts emerge. Don’t cling to old assumptions.
9. Control for biases and illusions that distort thinking.
10. Use numbers and categories precisely, not vague approximations.

Applying this open-minded analytical process protects investors against misjudging risks and opportunities due to outdated mindsets and biases. It encourages developing a nuanced, probability-driven worldview.

The Data Revolution

New data sources and analytical tools allow investors to quickly gather abundant information and spot emerging trends early. Big data analytics can drive investment research and quantitative strategies. However, more data requires more statistical skills to avoid misinterpretation. Basic mathematics, statistics, programming and data science enable harvesting insights from proliferating data. Data literacy is now an essential investor skill alongside financial literacy. Take advantage of new fintech capabilities but learn their languages - statistics, code, algorithms.

Overpopulation Fears

Concerns over surging population growth are common. However, the global fertility rate has dramatically declined, not just in China due to the one-child policy. Africa has seen rapid drops as well. The population will likely plateau at around 11 billion by 2100, lower than most predictions. Labour forces are shrinking in many countries as populations age, not explode. So while environmental issues remain, overpopulation may not be the core driver. Consumption patterns in developed countries have a larger ecological impact than poor country population growth. Update assumptions on demographic trends.

Climate Change Realities

Climate change is a hugely critical challenge. However, some common fears are exaggerated according to climate scientists. Examples: Antarctic ice sheets melting and sinking cities are low probability worst-case scenarios, not the likely trajectory. Visions of armed conflicts over resources are unrealistic doom scenarios. Climate change more often exacerbates existing societal tensions than directly causes them. Separate realistic projections from activists’ exaggerated rhetoric. Model probabilistic warming scenarios and adaptability, not only dire extremes. Factor climate mitigation opportunities alongside risks.

Navigating the Post-Fact Era

Social media proliferates false information faster than ever. Authoritarian regimes increasingly distort data. “Post-truth” mindsets reject inconvenient facts. This environment makes sober fact-based analysis challenging but critical. As an investor, insist on credible data sources, not unverified online claims. Support initiatives to increase data transparency and integrity. Call out disinformation where found. Ground analysis in empirical reality, not politics or speculation. Factfulness is a competitive advantage in navigating today’s complex fast-changing markets. With rigorous scepticism, data analysis skills, and disciplined unbiased thinking, investors can achieve better results.

Conclusion

Investors avoiding outdated instincts and honing critical thinking skills gain an edge. With clear eyes and rational analysis, not emotions, investors can identify asymmetric opportunities and mitigate risks.