The Abilene Paradox in the Investment World

The Abilene Paradox in the Investment World

Do you often feel that you are heading in a direction you may not want to, but you still head that way because you assume that’s where everybody’s going?You want to observe traffic rules, but you see everyone ignoring the red light and you do the same. Someone breaks the lane while driving and the whole convoy follows suit making the jam worse. You and your spouse decide you must save money, but on a boring afternoon, with nothing to do, because there is a Sale going on, you end up shopping, buying something you didn’t want, assuming your spouse will feel good and later, you both end up being miserable about the wasteful spending.Nobody wants to pay a bribe, but we think others will do so anyway, so we do it ourselves to avoid becoming victims of the system.We all know we are burdening our kids with excessive studies, but we send them to JEE classes and special tuitions anyway as we don’t want them to be left behind in the rat race. We all scream about pollution and traffic, but we will not car-pool or take the public transport to work.Why do we do this, is there any hidden logic behind this?On my birthday a couple of years back, I wanted to take my family out for dinner. I asked my wife where can we go? Knowing that I like Sea food, she immediately said: “Let’s go to Swagath”Both my sons nodded in agreement.On return my elder son said: “I wish Papa had taken us to Mainland China – he loves Chinese food.”“Or at least to Bar B Que Nation for the wonderful and unlimited spread ” added my younger one.“Yes, I too would have loved to go Mainland China”, I said.My wife looked surprised: “But didn’t we all unanimously agree to go to Swagath,” she asked.I said sheepishly “You had suggested and I agreed, I didn’t want you to feel bad.” And both my children nodded in agreement.Here were four people who of their own volition would not have gone to Swagath but collectively agreed to go there. A story quite similar to the original story played out in Abilene.On a hot afternoon in Coleman, Texas, the family is comfortably playing dominoes on a porch, until the father-in-law suggests that they take a trip to Abilene, a town 53 miles North for dinner.The wife says, “Sounds like a great idea.” The husband, despite having reservations because the drive is long and hot, thinks that his preferences must be out-of-step with the group and says, “Sounds good to me. I just hope your mother wants to go.” The mother-in-law then says, “Of course I want to go. I haven’t been to Abilene in a long time.”The drive is hot, dusty, and long. When they arrive at the cafeteria, the food is as bad as the drive. They arrive back home four hours later, exhausted.One of them dishonestly says, “It was a great trip, wasn’t it?” The mother-in-law says that, “Actually, she would rather have stayed home, but went along since the other three were so enthusiastic.” The husband says, “I wasn’t delighted to be doing what we were doing. I only went to satisfy the rest of you.” The wife says, “I just went along to keep you happy. I would have had to be crazy to want to go out in the heat like that.” The father-in-law then says that he only suggested it because he thought the others might be bored.The group sits back, perplexed that they together decided to take a trip which none of them wanted. They each would have preferred to sit comfortably, but did not admit to it when they still had time to enjoy the afternoon.

This is the Abilene Paradox.

This parable is often used in management training for many corporations This is a phenomenon, which also happens regularly in the Investment world.Prof. Jerry Harvey calls it “The Inability to Manage Agreement”.The Abilene Paradox occurs when a group of people collectively decides on a course of action that is contrary to the preferences of many of the individuals in the group.Prof. Harvey states in his paper ‘The Abilene Paradox’: “Individuals frequently take actions in contradiction to what they really want to do and therefore defeat the very purpose they are trying to achieve”. This is the inability to manage agreement.He adds: “The inability to manage agreement, not the inability to manage conflict, is the essential symptom that defines people caught in the web of the Abilene Paradox.”The Abilene Paradox describes the situation where everyone goes along with something, mistakenly assuming that others people’s silence implies that they agree and the (erroneous) feeling to be the only one who disagrees makes a person shut up as well, all the way to Abilene.In the Investment world, when the advisor throws an idea, e.g., lets invest in Debt Funds or Balanced Funds, or whatever is the “Hottest” theme, the investors immediately agree and invest there.When the well known investor or a renowned fund manager, like Lets say Warren Buffet, and he says the market is not overvalued, we all tend to agree and follow, even though all valuation parameters may be pointing to the contrary. We tend to believe the Pink papers and the financial channels as the gospel truth even though our common sense may point otherwise.Similarly if the bread earner decides, that Equity is the best investment class, other family members will agree despite the higher risk and lack of market knowledge, Or when the Grandfather recommends a Bank FD or a LIC endowment policy, as the best investment, the family becomes duty bound to invest some portion of the corpus in the recommended Asset Class, even though it may not fit in the Asset Allocation strategy.This action is done because everyone in the group thinks he would look stupid if he disagrees and does not want to annoy the other person. He feels how can such trusted advisors and experienced hands be wrong and for him, standing out as a lone voice is very embarrassing.Hence, this leads the group to decide on ‘yes’ when ‘no’ would have been the personal and the correct response of the majority.

Individual group members fail to take action on their own beliefs because of the anxiety they experience about voicing opposing ideas. This action anxiety is fueled by a belief that voicing an opposing view will result in negative outcomes. This negative fantasy may be reinforced by events where individuals who voiced an opposing view were labeled as not being team players. If this occurred, a real risk does exist. The risk of being ostracized from the group results in separation anxiety. The individual copes with separation anxiety by agreeing with the group. This agreement is the psychological ­­­­reversal of risk and uncertainty.

Be careful of the unintended consequences of a Great Idea.Consult your financial advisor to get the right perspective and arrive at the right decision. Don’t get stuck in the Abilene Paradox, Follow your strategy to achieve your goal & your dream. You can please people in other ways.Happy Investing!Stay Blessed ForeverSandeep Sahni

Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.About The author

Sandeep SahniSandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. Hons. Class of 1985.)Sandeep’s investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals. Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.He also writes a well read blog; has also conducted presentations, workshops and guest lectures at Management institutes for students on Financial Planning and Wealth Creation.He can be reached at:+91-9888220088,         Follow us, 

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