I came across this Scientific American article in August and was struck by its relevance to a number of conversations we were having with investors. Without going into great detail, we were discussing a couple of investment opportunities that could be classified as esoteric or “off the run.” In many of the initial conversations, investors were trying to dig deeper into the opportunity in order to find an analogous thread that they could follow back to a previous investment or experience. While this is extremely valuable in helping suss out the types of risk inherent in any possible investment, what if the exercise misses the mark completely? What if we are applying our past experience incorrectly, neutering our ability to assess something that is truly novel?
Hypocognition is defined as the “lack of a linguistic or cognitive representation for an object, category, or idea.” In other words, it focuses on the unknown unknowns. As we attempt to fill in the gaps, we need to be careful of going too far and becoming vulnerable to its opposite – hypercognition – where we over apply familiar concepts to areas where they do not belong. As investment teams look for edge in uncorrelated themes and investment strategies, the will most surely have to find a balance here.
We look forward to building upon this theme at our 2019 Time Summit where David Dunning will provide insight into his work and its implications for investment behavior.
To learn more about the 2019 Time Summit, visit timesummit.org.
