Behavioral Bias On The Farm

IMG_0702The cycle of life occurs frequently on the farm.  Cute pictures of newborn baby calves getting a drink of milk are easy to find on Instagram.  But, the closer we are to the beauty of life, the closer we are to death out on the range.

When my family returned from our annual beach trip the largest calf of the season had been born.  He was doing well at first, but then it got extremely hot.  He got stuck in a muddy area that likely exhausted him.  The next day he was lethargic, but still nursing. Then, the following evening with the 6:00 PM temperature registering 93 degrees I found him lifeless under a tree.

Our Vet believed he got an infection that depressed him, upset his stomach, and ultimately caused us to lose him to dehydration. He speculated that due to the size of the calf that he may have been unable to stand at birth and missed the critical window for getting colostrum which provides the first 3-4 months of immunity before a calf’s own immune system develops.

I second-guessed my decision not to treat the calf the night before we lost him. I could’ve given him oral electrolytes to begin the rehydration process and vitamin shots to boost his micronutrient levels. Deciding whether to intervene is a difficult decision at times like this.

In 2016, we had a situation where the decision to intervene was obvious. A cow had a calf in an extremely hot part of July and I noticed that she hadn’t brought the calf out of the woods for several days.  I decided to look for him and when I found the calf he was missing part of his hide along his ribs and along his back and was covered in flies and bees.  Not a pretty sight.

I thought he had been attacked by something.  Our Vet believed that he had a photosensitive reaction to his mother’s milk; or in other words, he had a terrible sunburn.  Treatment consisted of hosing him off and administering penicillin and screwworm spray daily for several months.  He had to be weaned from his mom so he became a bottle calf and received the name Carlos.

Carlos

Eventually, he began eating enough feed and was growing so we were able to stop bottle feeding him.  We built a hutch area that was shaded and cooled with an old fan in summer.  In the winter we sheltered him from the wind and lined the hutch with straw.

Carlos got big and we were able to put him with a group of yearlings for company.   He probably fathered a couple of calves but was not an ideal herd sire for our operation.  It was suggested that we send him to the butcher, but nobody in our family could imagine doing that.

A lot of farming is sweat equity.  The returns to labor are low or even negative.  My plan was to put enough weight on Carlos to just break-even.  The thinking was highly suspect.

Mollys GameThere’s a scene in the movie Molly’s Game where a disciplined poker player losses his economic rationality after being bluffed by a poor player and goes full tiltMolly narrates that,  “I just gotta get back to even,” should be posted on every gambler’s obituary.

Our psychological and behavioral biases often overwhelm our ability to make decisions in our economic interest.  In that scene, Harlan goes from a strategic grinding poker winner to divorcee over the course of several days.

The work of Daniel Kahneman and Amos Tversky have become very popular in behavioral finance circles.  Thinking Fast and Slow is a seminal work in this area.

In a wide-ranging discussion, Daniel Kahneman discussed the Endowment Effect on the Farnam Street podcast.  He describes the Endowment Effect using the example of someone buying a sandwich believing that they should sell it for more than they paid for the sandwich.

Kahneman makes two important points about the Endowment Effect with interesting ramifications.  He says that it is more painful to give something up (selling) than to get something (buying).  He also says that potential losers fight a lot harder than potential winners.

The Endowment Effect and it’s closely-related behavioral bias cousin the Disposition Effect impact investors.  Investors are more likely to hold an investment with losses than they are to continue to hold an investment with gains.  Riding winners and cutting loses is a more profitable trading strategy.

Quantitative Investor Jim O’Shaughnessy says that the last advantage investors have is Arbitraging Human Nature.  Jim and his firm OSAM utilize computer models with disciplined rules to remove human nature from investment decisions.

Individual investors can use behavioral hacks to accomplish similar goals.  Setting a stop loss on speculative holdings is one.  Others include ignoring financial news and only looking at investment performance annually.

Reversion to the mean is one of the strongest rules governing finance.  Establishing set allocations between equities and bonds, market capitalizations, domestic and international, and even factors systematically provide investors with a method to sell winners and buy losers.

gordon_gekko_3There was an opportunity to demonstrate economic rationality once the question of life or death for Carlos had been answered in the affirmative.

The question would you buy this animal and the response would have demonstrated the bias I was demonstrating.  If I wouldn’t buy the animal at a specific price in its current condition then I should’ve been a seller rather than caving to loss aversion.  The economics didn’t support daily feedings which I begrudgingly did for over a year.

As Gordon Gekko said, “Don’t get emotional about stocks.”  They don’t know you own them.

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