Conditioned Fear and Variability in Forecasting
It was sheer luck that the Labrador Tiberius joined our family at 10 weeks of age. Tiberius (then a 9-week-old puppy) had been returned to the breeder because the original owner tried to crate-train him and he had cried non-stop. He came to us, received a proper bed and settled straight in with lots of cuddles.
Crate training forces a dog to acclimatize to and bond with its crate enclosed bed resulting in improved control of the animal. According to the RSPCA Victoria:
“…a crate is a fantastic way of teaching it (the puppy) the boundaries of the house and keeping it safe. When ... you may need to confine your dog (eg. after surgery or if it has been injured), it’s much easier and safer if your dog has been trained to enjoy being in a crate.”
Humanity was crate trained over 2020 and learned why Tiberius found it distressing. Locking anything in a confined space changes its psychology and that process does not come naturally. However as the RSPCA notes, the psychological changes it catalyses are enduring: the dog becomes 'trained to enjoy being in a crate’. The US Army learned similar lessons about the psychological impacts of keeping soldiers behind barbed wire during the Vietnam war.
What does psychological change have to do with investing? Psychology drives behaviour; needs and wants drive how and where money is spent, which drives sales, profits and cashflow. Psychology drives cash generation.
The world has become more conditioned to stay at home and that is already driving behaviour. Houses are in short supply in the US, prices for building materials like timber increased, online services consumption jumped.
In many parts of the world the pandemic is ongoing in 2021. As I write Europe is bunkering down for its third wave. Fear and caution are everywhere. Japan reimbursing foreign ticket holders for this year’s Olympics is the latest example.
Fear is a powerful incentive for changed behaviour. The Twin Towers and Chernobyl resulted in enduring changes to behaviours.
Changed behaviours and spending patterns from this new conditioning are only starting to become clear. Risk is variability so we need to respect and incorporate this uncertainty in making long term forecasts.