As a farmer, you make 100’s, if not 1,000’s, of decisions during any growing season.
From what you’ll plant, to when you choose to market your crop, and everything in between.
Research suggests that we aren’t as rational of thinkers as we think we are.
That can be especially true in an industry such as farming where so many factors influencing your financial outcome (weather, markets, etc) are outside of your control.
This uncertainty can lead to irrational decision-making. Much of this irrationality can be attributed to the effects of cognitive biases.
That’s why I’ve decided to profile how this biases can impact farm management decisions.
Lets get started!
1 - Confirmation Bias
Confirmation bias is the tendency to process information by looking for, or interpreting, information that is consistent with a person’s existing beliefs.
This is the psychological tendency to favor information that confirms our beliefs and to disfavor information that runs counter to them tends to be magnified in the echo chambers and “filter bubbles" surrounding the internet and social media.
Never before has it been so easy to access endless sources of information via the internet, credible or not.
This desire to find information that confirms with our existing beliefs tends to cause us to lower our credibility/factual hurdle.
Let’s look at an example….
Last fall when commodity prices once again began following their cyclical and seasonal downturn, I hopped online to try to do some research on how or why commodity price could follow their seasonal upturn in 2018.
I read a few articles and some forum posts and stumbled across someone who’d posted a long-term chart of soybean prices. This chart painted a bullish picture.
I thought to myself, “that sure makes a lot of sense”. This was the confirmation bias at play.
I had just got done reading a number of articles by respected industry experts but I was (maybe subconsciously) choosing to give the most weight to an anonymous blog post.
Furthermore, I solidly believe that no one can predict commodity prices with any repeatable “edge”. But here I was “buying into” a damn anonymous blog post.
I had to give myself a scolding, “get your crap together Nick”!
Let’s take a look at how it can affect farm decision making.
Confirmation bias rears its ugly head more often than most of us would like to admit.
Confirmation bias can bite us in the butt in all sorts of ways.
- “I don’t want to spend any money on equipment this year” leads to “I really have a hard time believing that these y-drop systems have a positive ROI”
- “See, I knew XYZ seed was an underperforming (while reading test plot results from a competitor)”
- “I knew cover crops don’t work in my area (after seeing one picture of a poor corn stand)”
- The most obvious example that we will not dig into: politics
How can we deal with confirmation bias?
- Conduct your own testing on your farm or in your farm business. The key is tracking both the results and what leads to the results (attribution analysis).
- It sounds easy to do, but make a point of really analyzing the credibility and the biases of the sources of your information.
- Understand that sometimes sample sizes in farming are simply too small to get definitive answers. You may be forced to make educated guesses on marketing/agronomy/capital allocation decisions.
Confirmation bias is a powerful thing that can really lead us astray in our decision making.
Remember it the next time you find yourself “buying into” data that fits your preconceived idea/values/beliefs while needlessly discounting information that does not.
Onto the next bias!
2 - Survivorship Bias
Survivorship bias is the logical error of concentrating on the people or things that made it past a selection process and overlooking those that did not.
Survivorship bias does a few things…
- It focuses on those that made it while ignoring those that did not.
- It hides the effects of randomness
- It downplays the effects of luck.
Here’s a great example of survivorship bias. This story should hammer home the impact of neglecting to realize survivorship bias.
Abraham Wald was a Hungarian mathematician who emigrated to the United States. During World War II, he was a member of the US military’s Statistical Research Group (“SRG”).
The SRG was group of very smart people put together at the request of the White House and made up of people who would go on to compete for and win Nobel Prizes. The SRG was an extension of Columbia University, and they dealt mainly with statistical analysis.
They were given a project to learn how to best protect US military planes from enemy gunfire.
They would look at planes returning from war, and see which areas had the most bullet holes. Clearly, these areas were in need of protection – so the recommendation was to enforce those areas of the planes with armor for future missions.
Mr. Wald saw an obvious flaw in this analysis which had evaded many of his peers and produced an elegant fix.
He reasoned that if a plane is returning from combat, it means that it was not shot down by the enemy. In response, the areas that had a higher concentration of bullet holes were least in need of protection, because the planes could survive a strike on those points.
Instead, Wald concluded: reinforce the areas where returning planes had suffered no damage. Those areas of the planes were most likely to be mission critical, because no returning plane had bullet holes in those areas.
This is how survivorship bias works. It’s an incredible analytical tool, used correctly. If you’re a numbers nerd as I am, you can see a detailed analysis of how Wald conducted this analysis here (PDF).
Survivorship Bias and Mutual Funds
One of the most obvious impacts of survivorship bias that most of us will face at some point in our lives its involvement with stock market returns.
In particular, it tends to really skew the results of mutual funds.
Mutual fund performance reporting typically only includes the returns of funds that exist today. Common sense tells us that mutual fund companies don’t typically shut the doors on successful funds and/or managers.
In 1996, a study was done to estimate the size of the bias across the U.S. mutual fund industry (source). It calculated a bias of 0.9% per annum, where the bias is defined and measured as: “Bias is defined as average α for surviving funds minus average α for all funds” (Where α is the risk-adjusted return over the S&P 500. This is the standard measure of mutual fund out-performance).
When you’re presented with investment returns, always keep survivorship bias in mind.
Lets now move on to the farm.
Survivorship Bias and The Farm
While most of us will agree with the logic behind the survivorship bias, it becomes a bit less clear how it relates directly to your farm and your farm management decisions.
I’ve deducted a few things to keep in mind when thinking about ways to improve your farm.
- Learn from your failures. Unlike Wald and the SRG, you often get a chance to actually learn from the attempts that failed. Many decisions you make on the farm are wrong, embrace them. They give you many opportunities to learn from. Why did a lower seeding rate not “win” or why didn’t split-applying N yield a positive net ROI? Learn, learn, learn!
- Learn from others’ failures. Instead of just looking at those that have built successful farms, you should seek out and document reasons for failure in other farms and industries. Just because you see a couple successful neighbors with a lot of owned land doesn’t mean that there aren’t many more of them who tried and failed to aggressively buy land and it cost them their farms (hypothetical example!).
- Possibly the most important (in my opinion)….Keep in mind what Wald found out from his experience at the SRG - sometimes you succeed only because your vulnerability hasn’t been attacked. Be ruthless in evaluating what your vulnerabilities are, and focus on addressing them. They’re probably not where the bullet holes are.
Survivorship bias is particularily nasty. Keep your eye open for it.
3 - Groupthink
Groupthink is a phenomenon that occurs within a group of people that have an often hidden desire for harmony in the group that often results in irrational decision making.
Group members often try to subconsciously avoid raising controversial issues or alternative ways to solve a problem, which creates or leads to a lack of creative and independent thought.
This often occurs more in a corporate setting but I’ve seen it pop up in farm groups over the years.
Before discussing those farm specific examples, lets review possibly the most famous off-farm example of groupthink.
Bay of Pigs Invasion
Much research has been done on the topic of groupthink with most if it initially being done by a researcher named Irving Janis. One of Janis’ primary examples of groupthink was the Bay of Pigs invasion.
The Bay of pigs plan was crafted by the Eisenhower administration, but was executed by the Kennedy administration. Janis is found that the administration “uncritically accepted” the plan of the CIA. When a few members of government (Arthur Schlesinger and Senator Fulbright), voiced their objections they were largely ignored by other members of the administration.
This caused those with doubts, Schlesinger in particular, to minimize his own doubts causing a form of self-censorship (source: Janis’ groupthink paper).
Here’s a classroom lecture that discusses the Bay of Pigs invasion and groupthink: https://www.youtube.com/watch?v=rHwKc5lzLY4
An important lesson -> Bay of Pigs was a disaster that cost many lives and an embarrassment for the US government. Yesterday I mentioned the importance of learning from failure. Just one year later, the US government successfully used lessons from Bay of Pigs in its handling of the Cuban Missile Crisis.
Groupthink on the Farm
I’ll share a story with you a first-hand story I experienced with group think.
I was called into a tough farm financial situation by a lender. They had a farm client who’d accumulated a multi-year stock pile of corn.
They had held onto some of their 2012 corn into the inverted market in the summer of 2013. If anyone remembers, as soon as end users rolled their bids forward it was a cash price bloodbath.
In many areas, the cash price for corn fell $.70+ in one day and well over $1.00 in a week. Very very hard to sell after that type of a decline.
So, they held…..
Fast forward a to the spring of 2014 they were still holding that 2012 crop along with all of their 2013 crop. Their working capital had gotten crushed. Specifically because this area was also faced with by far the worst corn basis it had ever seen due to rail delays/premiums.
There was a silver bullet though….this farm had planted almost the whole farm to corn in 2013 and soybean prices where rallying strongly in 2014.
My suggestion to a group of people from the bank (and the farmer) was the following.
- Plant nearly the whole farm back to soybeans and use a combination of futures, forward contracts, and puts to lock in a $1-2 profit on the whole crop (assuming APH yields)
- Plan to store the corn for another year but hedge it. I had assumed that there was a 75% chance that the farm could pick up a $1.00 gross return on storage (yes, basis was that bad!).
The bankers tore my idea apart. “Why would we reward this guy for his past mistakes!”
To them, extending his operating note vs. a full-blown restructuring was a “reward”.
My idea of a reward was this strategy that offered a realistic chance of adding back a much-needed $100/acre of working capital to his farm.
After the meeting, one of the junior bankers called me and said something similar to “great thoughts Nick, but it’s not going to fly with this group”.
I admittedly know very little about banking regulation so I’m going to give them the benefit of the doubt and assume that their hands were tied a bit by my suggestion.
But I’ve always had a sneaking suspicion that the prime culprit here was groupthink.
Hindsight is 20/20 so I hate to even mention this, but the plan would’ve worked just as I assumed but they sold him out of his corn.
(Don’t get me wrong here, the farmer “made the bed” but we all need to focus on how we can make the best decision possibly looking forward not backwards.)
I will also admit that this is an extreme example of groupthink.
See below for a much more common occurrence…..
——> My key lesson when thinking about groupthink on the farm is this. Be extra cautious of groupthink creeping in when dealing with outside opinions on your farm, especially if they have a financial incentive to keep you happy. That person is highly incentivized to not “rock the ship” and can easily just tell you what you want to hear.
That’s all for Part 1 in this series on cogntive biases.