Tag Archives | stock

Durability Bias in Business

Durability bias in business is the tendency of people to project recent trends or occurrences into the future. If it happened in the past, then it must happen in the future. The term is often used in behavioral science and forecasting.

Durability Bias in Business

How does durability bias apply to business? Often business professionals project short term trends into the future. They believe that the recent good times will last forever, conversely, they also believe the bad times will go on indefinitely!

The stock market is a good example of durability bias in action. When the market is booming you start seeing books titled, “Dow 20,000”, hitting the bookstores. People started buying stocks and an euphoria took over. Last fall the opposite happened. Stocks started dropping and soon we were in a financial crisis.

For the past six months the stock market has gone from maximum pessimism to the beginnings of optimism. Stocks have risen 21% in the past six months and over 39% since the low on March 9th. Right now the durability bias is on the downside, however, as these gains continue the bias will shift to the upside.

So what is your durability bias telling you? Are you running your business as if the tough times are going on forever or are you investing in your people and infrastructure to take advantage of the recovery?

Durability Bias in Business

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FDIC Bank Failure Watch List: Leading or Lagging Indicator?

The FDIC produces the FDIC bank failure watch list every Friday at 7:00p.m. As of April 24th there were 29 failed banks in 2009. There were only 25 failed banks in 2008! If this trend holds true we should have 85 to 90 bank failures in 2009! A 350% increase in bank failures in 2009 over 2008.

Analysis on FDIC Bank Failure Watch List

I suppose that isn’t really a surprise given the turmoil in the banking system. My question is whether the bank failure watch list is a leading or lagging indicator of the economy. If you look further back into previous years you see that 2007 had only three failed banks; and 2005 through 2006 had no banks failing. Should we have seen a stock market top with so few failed banks insured by the FDIC? If the banks are doing so well does that indicate easy money? Should we have been reducing our exposure to the stock market?

Now the trends are going the other way. It is time to ask: Should we buy stocks when the bank failures peak? When we no longer have an increase in the number of banks failing does that indicate that the economy is bottoming out?

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FDIC Bank Failure Watch List

FDIC Bank Failure Watch List

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