The focus of my reading lately has led me to a concept known as regression to the mean. Daniel Kahneman and Michael Mauboussin each highlight the concept in regards to what is often seen as above average outcomes being spectacular, when the reality is they are more likely temporary swings of a pendulum against a baseline. In short, regression to the mean indicated that over or underperformance will, in some amount of time, return toward the mean value for that criteria with the driver of the timeframe being the ratio of skill to luck behind the outcome. A golfer who hits significantly under par will slowly return toward par, with the expedience of that return being based on the ratio of skill to luck on his success; if his success was 98% skill-based then return to the mean may be a much more drawn out timeframe. A longer term review of Fortune’s “Most Admired Companies” covering a twenty year span showed the worst rated firms outperformed those topping the list. These companies were chosen by “experts” with those experts displaying success in their depictions over a period of time. However over the long-run the calls made by experts were actually worse in predictions than throwing darts at a dartboard to make the same choices. This notion of current snapshot visibility due to success is often lodged in our minds as much more permanent than in reality. Capital Cities, who I have mentioned before, was a company led in a manner that was under the radar in it’s approach. No Wall Street face time, no press time, no big buildings in the middle of Manhattan. Yet the performance of Capital Cities far exceeded its competitors, namely CBS, who took the opposite approach. The idea that visibility of success is permanent requires a trained eye to look beyond the moment. News outlets are primarily focused on the short term, immediate impact and reaction amongst the public. X happened today and it was significant; if X was significant enough perhaps there is multi-day coverage. Yet, how often do we see a return to “where are they now” on hot stories or shiny penny companies topping the news reel? Rarely. The perspective lens we are offered through media is very acute against long term reality, and the fact that a glimpse of the whole shapes the opinion of many people over a long term period is unfortunate. It should be encouraged to wonder what details were left out of the visibility we are offered through media. Question everything, so to speak.
As you walk the isles of a retail store you’re confronted with innumerable choices, and prices. I was in quite the hurry the other day and without realizing it I selected a number of items from the grocery store that I was in need of and proceeded to the checkout. After checking out I realized that I never looked at the total cost of my purchase, and never looked at the cost of any individual item. It was a total grab and go. Because everything was an item I needed. And at that stage the cost didn’t matter. Further the cost was implicitly known to be within a reasonable range; a bag of rice wasn’t going to be less than $1 or more than $8, for example. As such I didn’t hesitate on any of the items needed. The drive home had me curious about the idea of buying only based on appropriate want and need. By appropriate I mean those things that fit your current state desires and needs, such as ingredients for a meal, a jacket for the winter, etc. If I needed a coat for the winter months and went to the store, why does price matter when I find the “right” coat? I’m in need, that item fits my needs and likes, and regardless of cost it will solve my current problem. If the cost happened to be high then downstream needs and wants would be impacted, but having my current available budget in mind will shape what falls into my needs and wants at any given moment. What I’m describing is a different approach to the psychology behind purchases and budgeting. My thought is that fear of excessive “high cost” purchases will lead to focus on essentials, but those essentials will not be hesitated upon. The end result being an ongoing buying history of what is most important to you, and liked, with elimination of frivolous and unneeded buying.