The “What You See Is All There Is” Fallacy

Looking beyond the obvious, with comprehensive due diligence.

Introduction

For retail investors, navigating the complex world of investments requires a strong foundation in due diligence. It’s crucial to understand that the information available on the surface may not reveal the entire truth about an investment opportunity. This blog post aims to shed light on the “What You See Is All There Is” fallacy and emphasises the significance of conducting thorough research before making any investment decisions.

Understanding the “What You See Is All There Is” Fallacy: The “What You See Is All There Is” (WYSIATI) fallacy, a term coined by psychologist Daniel Kahneman, and showcased in his excellent book Thinking Fast and Slow, refers to a cognitive bias where people tend to make judgments based solely on the information immediately available to them. In the context of investing, this means that retail investors may be tempted to make decisions solely based on easily accessible information, such as the latest news headlines, stock prices or marketing materials. Unfortunately, this limited view often overlooks critical factors that could significantly impact the investment’s long-term prospects.

Risks of Relying on Superficial Information: When investors fall victim to the WYSIATI fallacy, they may underestimate the risks associated with an investment. Limited research can lead to a lack of awareness about a company’s financial health, potential regulatory issues, or competitive challenges. Making decisions without considering the broader context can expose investors to unnecessary risks and potentially lead to substantial losses.

The Importance of Comprehensive Due Diligence: Due diligence is the process of thoroughly investigating an investment opportunity before committing funds. It involves digging deeper into a company’s financial statements, analysing industry trends, assessing management competence, and understanding the competitive landscape. Comprehensive due diligence provides a clearer picture of the investment’s potential risks and rewards, empowering investors to make well-informed decisions.

Investment Examples

Let’s look at five typical investment examples, and the all-too-real traps that can (and do) catch even the most seasoned time-pressed investors. Here’s how to help avoid the WYSIATI Fallacy by digging a little deeper and looking beyond the obvious:

  1. The Flashy Tech Startup:
    • Fallacy: Relying solely on the buzz and media attention, the investor jumps into investing in the tech startup without conducting due diligence. As a result, they overlook the company’s lack of revenue and its challenging competitive landscape, leading to significant financial losses.
    • Benefit of Due Diligence: With thorough research, the investor could have discovered the company’s financial status, analysed its market position, and evaluated its potential for growth. This due diligence would have helped them make an informed decision, either avoiding a risky investment or identifying opportunities for long-term growth.

  1. The Hot Stock Tip:
    • Fallacy: The investor succumbs to FOMO (Fear of Missing Out) and invests blindly in a stock based on a hot tip without considering the company’s fundamentals. This lack of research leads to losses when the stock price drops due to unforeseen challenges.
    • Benefit of Due Diligence: Here, the investor could have evaluated the company’s financial health, growth prospects, and competitive advantage. Armed with this knowledge, they could have made a well-informed decision, avoiding potential pitfalls and making investment choices aligned with their financial goals and risk tolerance.

  1. The Promising Real Estate Development:
    • Fallacy: The allure of the marketing material tempts the investor to invest in the real estate development without conducting comprehensive due diligence. Being unaware of potential risks, they fail to recognise the oversupply and demand dynamics, resulting in disappointing returns.
    • Benefit of Due Diligence: The investor could have thoroughly analysed the project’s feasibility, assessed the developer’s track record, and studied market trends. This research would have allowed them to make a more informed investment decision, potentially avoiding a troubled project and identifying more suitable real estate opportunities.

  1. The Overlooked Value Stock:
    • Fallacy: The investor dismisses a seemingly undervalued stock without conducting proper due diligence, assuming it lacks growth potential. As a result, they miss out on an excellent long-term investment opportunity.
    • Benefit of Due Diligence: Thorough due diligence would have allowed the investor to uncover the stock’s true value, potential for growth, and its solid financials. Armed with this knowledge, they could have made a well-timed investment, maximising their returns and diversifying their portfolio effectively.

  1. The Attractive Mini-Bond Offer:
    • Fallacy: The allure of high-interest rates entices the investor to invest in a mini-bond without fully understanding the risks. Neglecting due diligence, they are unaware of the bond’s unsecured nature and the potential for losing their investment.
    • Benefit of Due Diligence: By conducting due diligence, the investor would have assessed the company’s financial stability, creditworthiness, and the security backing the mini-bond. Armed with this information, they could have made a more prudent investment decision, choosing safer bond options and mitigating potential losses.

Combining Personal Research with Professional Insight

While conducting due diligence on your own is vital, seeking professional assistance from a third-party can significantly enhance the effectiveness of the process. And it’s something that’s often overlooked.

Independent due diligence can play a crucial role in mitigating the “What You See Is All There Is” fallacy for investors. It brings objectivity, thoroughness, and expert analysis to your due diligence, and helps investors make more informed, calm, confident, and well-calculated investment decisions. By combining personal research with insights from independent experts, investors can overcome cognitive biases, reduce risks, and increase their chances of successful investments in an ever-evolving investment landscape.

Professional due diligence is a valuable tool, but it doesn’t completely replace the importance of conducting your own research: as an investor, it’s essential to remain proactive and curious. Combining your personal research with insights from professional due diligence can lead to a considerably more well-rounded understanding of your potential investments, and help you find “what is” and not just what you see.

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