HUMMONEY - The Case of the Missing Gorilla (Perspective)

- by Greg Lewin

There’s a cognitive experiment that has been run a number of times and it goes something like this: a group of participants is asked to focus intently and complete a detailed somewhat repetitive task. In the midst of this effort a very unusual object is introduced into the environment the participants are focused on. In the example I saw the foreign object was a person in a gorilla suit. Upon completion of the task (in my example the participants were counting balls) only some of the participants were aware of the gorilla’s presence. Other participants never noticed a man in a gorilla suit walking through the scene. This can be called perception blindness, describing how unaware people can become of their environment when focused on a specific repetitive task.  This lack of awareness of change can be the sort of blindness that can lead to real risk of capital loss in the investment process.

Take last week. Global markets surged on the back of a statement by US Federal Reserve Chairman Ben Bernanke that the economic recovery was continuing to show real weakness and that additional liquidity may need to be injected into the financial system for support. Clearly, world markets were focused on the repetitive task that injecting liquidity makes markets rise but they failed to notice that, for example:

-        Another important economic official left the US administration,

-        New home sales in the US in August were the worst on record,

-        Or the stunning observation by Walmart’s CEO that just after midnight at the end of each month sales of consumer staples surge as electronic benefit cards get activated,

-        Or most importantly, that the previous attempts to inject liquidity into the global economic system have led to little to no sustained economic response.

But if we stay wed to our narrow focus and our narrow range of responses we will ultimately fail to notice the gorilla in the room or better popularized as the Black Swan.

The key as investors is to be aware of this human frailty so that you have a much better chance of combating the typical response and hopefully become aware of the much broader universe of outcomes you can choose.

In my opinion the single most important quality to becoming a successful investor is the ability to stay balanced and dispassionate so that you are in position to make the next best decision. But in order to execute with a quiet and calm disposition you must also be aware of all the relevant information present, and that is why fighting perception blindness is so important. Because who would not want to be aware of the gorilla in our midst.     

---The views expressed here are of the author, HUMMoney contributor Greg Lewin; currently a General Partner at TLF Capital, an investment management firm. During the past 26 years he has been a senior money manager or partner in Wall Street firms including Neuberger Berman, Charter Oak Partners and Sailfish Capital.