How would readers of Nobel prize laureate Daniel Kahneman’s book “Rationality, Fairness, Happiness” analyze stock value and what would they say about Tesla?
When Elon Musk promised to deliver the Model 3 Tesla within a limited time frame and with an ambitious consumer price tag, some lost hope as the company missed its own forecasts again and again. They read analysts’ reports showing in every possible way that Tesla simply would be unable to deliver on its promises. Many even rushed to sell off their Tesla stocks.
Should we choose to read Economics Nobel Prize laureate Daniel Kahneman’s book “Rationality, Fairness, Happiness,”which also includes insights from Amos Tversky and additional colleagues, we would encounter a story we are all familiar with. Kahneman shares an example of a team working on a new educational plan. They are asked to predict how long the new plan will take to implement and will it actually materialize. Through this and some additional supportive research, Kahneman proves that estimations are highly dependent on the way questions are phrased. Phrasing a question that sets people up for an internal point of view will provide one answer, while a phrasing that sets a person up to consider the external point of view is expected to provide a completely different answer.
Kahneman explains in his book that an inside estimation might be prone to micro considerations that tend to over occupy our minds, while an outside estimation is frequently expected to serve us better in predicting future outcomes.
Looking at the Tesla case, this means if we occupy ourselves with the fact that production poses many challenges and has also failed to meet its targets, factoring in the many technological issues, the shortage of cash flow and a looming deadline, Tesla pulling off a success would seem to be an unlikely outcome. But should we choose to examine the situation from an external point of view, examining a different set of factors would lead to a very different conclusion. Analyzing the chances that Elon Musk took with Zip2, PayPal, SolarCity and SpaceX and comparing the circumstances to those of Tesla, would point to a more optimistic conclusion. Considering the history of Telas’s past endeavors, and its team that has been able to solve endless challenges, would also point to a different prediction than that of someone considering internal factors.
However, based on Kahneman’s writings, considering a problem using external parameters poses a challenge in itself. One may think: Well, I am no car or stocks expert, but Musk has succeeded so many times with so many different companies, industries, and with such significant and diverse challenges, so he is most likely going to make it all happen again. Such a thought process based on Kahneman’s book would be unnatural for us humans since it forces us to ignore existing intuitions regarding facts on the ground that seem relevant to making a proper assessment, but are they?
Today, at least for some people, it is clear that whatever venture Musk decides to take upon himself will pay off, literally. Be it a long-range battery, a low-cost, self-driving electric car or inhabiting Mars.
But for many others, winning a battle against giants like Ford, General Motors, Volkswagen and Toyota or inhabiting another planet cannot be compared to helping a web company like PayPal, despite its complex regulations, become successful. For these people, the fact that Musk and Tesla made it with a small, expensive roadster in low scale production does not mean that mass production will be equally successful. Perceiving the success of the Tesla Model S is also a case of limited wisdom in the eyes of those more skeptical. After all, a $100,000 vehicle cannot guarantee fruition, right? Some will never be able to stop doubting the practicality of Tesla’s ambitions while others will only bank on Tesla’s successes.
So how do we separate fool’s gold from something that can evolve into real profit? Shortlist holders and analysts gambling against Tesla are, of course, right when they claim that Tesla might not make it, that this time the company cannot pull off another victory, and the fact that Telsa and Musk won so many battles does not mean they are about to win the next battle or the war. Nevertheless, one cannot be quick to cash in such claims just yet. There could be a big difference between what can happen and what is likely to happen.
It is important to remember that regardless of statistics, behavioral economics, or what our own experiences teach us, should we choose an external point of view to examine the Tesla and Elon Musk case, even with taking into account Tesla’s history of pulling off seemingly the impossible, it would sound irresponsible and superficial, perhaps even foolish to claim that Tesla will continue to succeed as it practically always did. But wouldn’t it be twice as foolish not to make such claim?
Successfully predicting the future is an easy task for no one. Similarly, successfully predicting stock value is a difficult task. Perhaps based on Kahneman’s book, we can add one more factor to the list which each of us assembles based on their own personal considerations and needs: the appropriate external point of view – be it the one presented in this article or a different one. It could be, that above all else, as Kahneman suggests with regards to any list of considerations, is the need to give each factor its appropriate weight. A task that Kahneman points as virtually impossible. But perhaps from the right point of view, nothing is impossible.
The writer holds shares of Tesla.
Click to order: Thinking, Fast and Slow / Daniel Kahneman
Click to order (only available in Hebrew): Rationality, Fairness, Happiness – Selected Writings by Daniel Kahneman, Maya Bar-Hillel (Editor).
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Money Making article
The approach presented in the article may help in taking adequate decisions which are practically “impossible” to make (or at least very unlikely) without being aware of some critical biases that we tend towards. This article presents an approach that may enable us to simply be right in more cases than usual based on well-based statistics.
1 million to 1 billion
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