Perception Can Overrule Reality in Driving Behavior, but Reality Will Overrule Perceptions in Driving Outcomes

December 21, 2006– In our casual Friday blog entry, the last for this year, let’s explore what investors can learn from the AI trade to the Denver Nuggets. AI, or the Answer, has always been one of my favorite NBA players. It’s funny, because there seems to be two camps of thought surrounding the Answer. There’s one that views him as a thug and seems to detest him. And there are those that love his heart. However, the truth is, it’s ridiculous to judge someone’s personal character without ever having spent a minute in that person’s company. I’m sure all the people who judge other people daily would hate to have other people judge them in the same manner yet they will never cease doing it. One really only has the right to pass judgment on AI as a basketball player where years of evidence on the hardwood floor have been logged for all to analyze and dissect.

allen-iverson.gifHis alleged strengths: a warrior, indefatigable, willingness to play through a multitude of injuries that many players aren’t, the quickest first step and deadliest crossover in the game, fearless, desire to win.

His alleged faults: takes too many poor percentage shots, doesn’t trust his teammates enough, selfish, interested in individual stats only, past unwillingness to practice hard, immature.

Still, there has been considerable argument even with AI’s faults. Some people will say that AI is not selfish. They argue that if he didn’t take the majority of shots for the Sixers night in and night out, the Sixers had no chance to win. Some argue that all his talk about change has been just that — talk. That no matter how many times AI spoke of trusting his teammates, that when push came to shove, he never learned to do what Kobe has learned to do — trust his teammates with the game on the line. I for one, agree with that last view. There was never an extended period of time in AI’s career where he willingly sacrificed about four or five shots a game to his teammates. As an incredible an athlete as AI is, if he had done so, and the Sixers lost an inordinate amount of those games, then he could have justified his dominance of shots taken in a team-oriented sport without appearing to be selfish. But he never did.

Now, with the trade to Denver, AI is paired with one of the brightest talents in the league, Carmelo Anthony. No more excuses for taking all those shots because no one else on his team could score. Sure, Sixers GM Billy King brought in C-Webb to play alongside AI, but King paired AI with C-Webb about five years past C-Webb’s prime.. The pairing of Carmelo and Allen is the one that everyone has been waiting for. After AI finishes the year with Melo in Denver, we finally get to see if all those years of criticism about AI’s perceived selfishness on the hardwood floor were justified or not. This year, we get to see if there is a true divide between the perception of AI as a basketball player and reality.

In investing, perception also dominates the market when people don’t realize what reality truly is. Take, for example, bird flu. Bird flu has at times, whipsawed economies of Asian countries into funks due to fears of detrimental human impact that have never come close to materializing. Even though we had yet to see significant numbers of human cases that would signify a human epidemic, at times the public punished the markets as if bird flu were a human epidemic. And it still may evolve into one. But markets don’t deserve to be punished based upon perceptions that haven’t become reality. Yet they are.

Then we had e-coli and hamburger scares over a decade ago in the U.S. when hundreds of people were sickened by fast food Jack-in-the-Box burgers and several children died. There was the perception that fast-food hamburgers were not safe food, and the stocks of almost all fast-food companies suffered as a result. However, this perception soon lifted, the stocks of these companies performed well again, and this year, an outbreak of e-coli related sicknesses hit Taco Bell patrons.

Again, what is reality versus perception?

After initial e-coli fears dissipated, the next fear to hit fast-food chains was Mad Cow disease. The U.S. FDA (Food & Drug Administration) has declared U.S. beef to be Mad-Cow free but the truth is of 375 million cows slaughtered in the U.S. from 1990 to the early 200’s, only 15,000 or about 1 cow out of every 25,000 that is slaughtered was tested in the U.S. for this declaration of mad cow free beef. The truth is, again, that with such negligible testing rates, nobody really knows if U.S. beef is mad-cow free. Yet the perception is that it is. So what is the point of this blog? The point is this. Perception can change behavior for endlessly long periods of time. However, reality will drive outcomes.

For example, the perception that fast food is clean and safe among the masses will continue to drive enormous consumption of fast food all over the world. However, if e-coli and mad cow are not being properly monitored, the reality is that people will get sick and possibly die. In global markets today where stock markets have seen a straight run higher for the last couple months, the perception among the masses that the markets are going to the moon continues to drive behavior. However, reality will set in soon enough.


J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.

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