Cause and defect - There are no straight lines from investment decisions to their consequences


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

Knowledgeable souls that they are, visitors to The Value Perspective will no doubt be familiar with Russian physiologist Ivan Pavlov’s research into conditioning – most famously, where dogs began to associate the ringing of a bell with the imminent arrival of lunch. What you might be less aware of is another classic experiment concerning cause and effect – this time involving human beings. 

This experiment, which has since also been carried out on the usual animal suspects – dogs, monkeys and so on – sees a short sound immediately being followed by a puff of air into the subject’s eye. As you might expect, the subject will blink but what has also been discovered is, if this is done enough times, the sound itself will be enough to make the subject blink. 

Scientists then began to investigate how short the period of time has to be for human and animal brains to put everything together so they eventually make the connection between a stimulus (in this instance, the sound) and a cause (the bell) so that an effect (the blinking) happens. The answer, it turns out, is ‘very short’ for humans and ‘very, very short’ for other mammals. 

The longer the period of time between the stimulus and the cause, the harder it becomes for the brain to associate the two. You can ring the bell an hour before the food arrives for as many mealtimes as you like and Pavlov’s dogs will never put the two events together. 

This is just the way mammals’ brains are wired – and, to a large extent, this includes humans, who might be expected to have a greater mental capacity to make connections over longer periods of time. Obviously mankind has managed to make some more linear long-term associations – for example, that planting seeds in the spring should lead to crops in the autumn. 

These connections now seem obvious to us because we learn them from others and yet, when humans were initially making those connections unaided thousands of years ago, it would have been much more difficult. The descendants of those early farmers, if that is what we can call them, face the same challenges in many different areas today. 

One such area, you may not be wholly surprised to learn, is investment – the problem being that the choices and decisions you make today may well not have any consequences or come to fruition until some years later on. To make things even more complicated, no single choice or decision you make is going to dictate your overall investment success (or otherwise).   

As an investor, you make numerous choices and decisions and not only do you have to be able to work out which ones had any material effect on the outcome – and potentially numerous years down the line – you should ideally repeat the process many times so that you can ascertain whether on average those choices and decisions tend to work out for the better or the worse. What that boils down to is that the stockmarket can be a very bad teacher and investors need to be careful they do not learn the wrong lessons from their experiences. 

Even if it were possible to draw straight lines between every investment decision and its consequence – which it is not – the human brain is ill-equipped to cope with the sort of timescales involved in investment. Without a coherent strategy to guide them, anyone looking to make a decision on their pension, say, is frankly as much in the dark as Pavlov’s dogs hearing a bell an hour before lunchtime. 



Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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