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Insider view Outsider view

When trying to look at an investment problem like Should I invest in ITC ? or should I buy Adani gas ? most investors look at these investing problems from their own view which is biased, tainted and fraught with unclear thinking or even worse high conviction on these ideas. We are suckers to "Confirmation bias" which will keep us away from looking at a problem clearly.


As Daniel kahneman in Thinking Fast and Slow says "People take an inside view when they should forget about his own case and look for what happened in other cases" If you think from physics this is like Einstein's theory of relativity, two people looking at a lightning from a different timeframes can experience light faster or slower than the other but speed of light remains the same.


Insider view is more of our own ideas and mental dispositions with which we think about a problem, I may be biased by ITC because of certain qualities I like in the company, which is totally my view, which may be biased and once I start focusing more time on reasons which are positive than I will be blinded by another Illusion called "Focusing Illusion" which says when your current focus is on some object or issue that will loom large like it is all there is to you which may blind your decision making process. Here's a recent example of how I was blinded by this illusion


Ex : I already have a pretty good wallet, but recently started searching to see if there is a good one to buy, until then my decision to buy the wallet was just 40%. As I looked in Amazon for quite some time the reasons for buying became real, I started to imagine the wallet in my pocket and how all it will look on me. That's a case of Focusing illusion. Had I bought the wallet, all I had dreamed of would never had occurred or could have been for a short period of time. I was suffering from


" Affective forecasting" and "Focusing illusion"


How Insider view affects our investing judgment ?


Lets say a few months back I was looking at an investment, A good chemical company which has branded its products which made the company to sell a commodity product with a brand at higher cost, increasing its bargaining power with its suppliers, The numbers looked fantastic, the ROCE was well above 25%, no debt, cash flows good, with all these data I thought ok this is a good company and should create wealth, I was very convinced that I bought a small quantity and started to accumulate gradually to say otherwise I was stuck in "INSIDER VIEW" of the company. Only later when discussing with a peer and brainstorming the idea i saw an "outsider view" which showed me despite all these good numbers there were some drawbacks in the company like Re-Investment risk.


Even after the new evidence I wasn't quick in changing my decision, due to " SUNK COST FALLACY" and I was thinking in " BLACK & WHITE " as a 0% or 100% when I should have taught in probabilistic terms, this is what Charlie Munger calls a LOOLAPALOOZA effect which happens in reverse and causes negative consequences instead of a positive one.


Not only when assessing an investment, but in most of the decisions we make we are stuck up in an Insider view thinking of what we know and how things should happen this is a bad approach to decision making which impairs the quality of the decisions. As Annie Duke mentions in Thinking in Bets that people are so close minded and rarely vet their beliefs, most of our decisions are from our beliefs and thus the hallmark of good decision making is calibrating our beliefs be it in assessing a quality of an investment or intrinsic value of the company.


A radical approach is to get opinions of others in a similar context where exchange of ideas and opinions can improve the quality of the decision making process, Thinking in probabilistic terms can also help avert an insider view, My view of a company with x characteristics being a multi-bagger is 60% that establishes a gap to think and communicate better with people around, when you say I'm 100% or 0% sure no one will be willing to open up and communicate their views.








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