Lares Capital
Hedge fund manager, small-cap, long/short equity

MIND CTI: A Victim Of The Law Of Small Numbers

In his great book Thinking Fast And Slow, famous behavioral economist and Noble laureate Daniel Kahneman describes a "law of small numbers" - a common behavioral bias of drawing a spurious conclusion when the number of observation is too small. The human mind has trouble accepting that many things in life are purely random, seeking instead an explanation based often on scant evidence.

Many micro-cap companies with a small customer base but otherwise stable business show great variance from quarter to quarter in revenue and income. Many investors take an outperformance as a sign that the business is accelerating only to be sorely disappointed the next quarter when the numbers revert back to its historical trend or even fall...

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