Tiny changes are hard to spot, which makes it difficult to see the potential broader impact down the road.
That’s the message from Professor Bakshi, who wrote a great piece, as it relates to a company’s competitive advantage. Gradual tiny changes can work to strengthen or destroy any advantage a company might have.
But the effect of small changes is not the easiest thing to recognize because management often fails to see the bigger picture.
Every day from tomorrow, if you start taking in 50 calories more than you expend, then you won’t look different the next day, or the day after. But if you keep doing this for a while, then, over time, your body shape will change. And if some friend of yours sees you after a gap of a few years, she will freak out.
Slow changes — both improvements and deteriorations — get magnified over time. But over short periods of time, they are barely noticeable for most people. Cognition, says Charlie Munger, misled by tiny changes involving low contrast, will often miss a trend that is destiny.
Why does this happen? Well, part of the reason is commitment bias. Part of the reason is pain-reducing psychological denial. And part of the reason is the boiling frog syndrome — failure to notice, slow gradual erosion of one’s competitive advantage, because one is focused on daily, weekly, quarterly or even annual changes, not long-term ones.
As Bakshi points out, these changes aren’t limited to competitive advantage.
Stealing his example: there’s a reason why so many fail at losing weight, but some do succeed. Those that fail, often get too focused on the outcome of “weighing a lot less.” They step on the scale every day (3 or 4 times a day). But when they don’t see a dramatic change (or even minor change) from one day to the next or one week to the next, they get discouraged and quit.
The people who succeed are the ones working a plan. They understand it’s not instant. The weight doesn’t pour off the moment they step into the gym, take a walk, or skip the late night snack.
They’re willing to put in the work today for the eventual bigger payoff (weight loss and better health). They might only lose a pound or two over the course of the first month. But after grinding out several months, they might notice 15 or 20 pounds missing.
The gradual process of burning calories (exercise) and eating healthier (dieting) needs time to have a noticeable impact on our bodies.
The same concept is how Warren Buffett got so rich. He was about 55 years old when he became a billionaire. Last week, he celebrated his 87th birthday. In the last 32 years, he’s grown his wealth 7600% (he’s worth roughly $77 billion, not counting charitable donations). In less time than it took to make his first billion, he made $76 billion more.
It’s also how Buffett learned so much about investing – one day at a time, one book at a time, one annual report at a time, and one failure at a time.
It’s called compounding.
A simple process repeated over and over can gradually have a huge impact — for the better or worse. Tiny changes add up.
- How Disciplined Will You Be in the Next Downturn? – D. Egan
- Why Alternative Investments Are Bad for Your Portfolio – WSJ
- 12 Lessons about Investing and Money from Dan Ariely – 25IQ
- Reciprocation Bias – Farnam Street
- Why Your Attitude is More Important Than Your Intelligence – WE Forum
- Robert Shiller Q&A: Bitcoin and Bubbles – Quartz
- The Bear Case for Crypto – P. Byrne
- Heads, I Win. Tails, You Forget We Had a Bet. – Slate
- Disrupting Investors’ Own Game – M. Housel
- Jamie Dimon’s $13 Billion Secret Revealed – Vanity Fair
- It’s Time To Ditch The Concept Of ‘100-Year Floods’ – Five Thirty Eight
- This Tiny Country Feeds the World – National Geographic