Thursday, November 22, 2012

Thinking about Thinking

The brain has a amazing ability to contemplate based on the sensory stimuli that it receives which it then matches with the memories that it has stored to arrive at a suitable response to the stimuli. This is common across all species and with us homo sapiens. The human mind however differentiates itself with other species in its ability to contemplate itself contemplating over something. This particular repetitive quality or as we popularly call it second order thinking, is to quote Prof Ramchandran’s talk on Ted the “Holy grail of  Neuroscience”
One of the interesting aspects of second order thinking is its ability to have a slightly more rational approach as it analyses the relatively emotional reaction of the first order thinking.  But to quote Yogi Berra “In theory there is no difference between theory and practise. In practise there is”.
So let me come to a practical experience that I went through last month. I had bought Hero Honda about a year and half back at around Rs 1400 . This was the phase post the break up with its erstwhile partner Honda and the market had turned bearish on the stock with the outlook for the company appearing bleak. I had at that point tried to sit back through the clutter, think through what were the key success variables in the two wheeler business and what value did Hero bring to the table. Though the market was focussing on the technology front, my thoughts led me to believe that the key differentiator ( beyond the brand/ positioning etc) that Hero bought on the table was the distribution strength that it had and the associated mindshare. Having looked at the past instances and examples of Bajaj  & TVS, technology was available off the shelf, maybe costing 400-500 crores which could be acquired and a product portfolio built in 2-3 year horizon. But building distribution especially rural distribution was a challenging task.
Fast forwarding and having collected about Rs 150 ( 70+35+45) of dividend along the way and missed opportunities to sell the stock at 2200 ( I got greedy :-)), I started pondering last month over how the business environment had evolved over the last one year. The company had moved forward on executing the technology gap by acquisition/ tie-ups and has progressed on taping the export markets. Couple of things have happened which made me start looking at a exit. The domestic market had slowed down and Hero was finding it difficult to grow on the large base that it had, coupled with slowdown in the export markets resulting in a relatively delayed launch in the export markets. But most importantly its erstwhile partner Honda has been making progress and gaining marketshare at a pace which to be honest I had not anticipated. 
This is where something interesting happened. As my brain started formulating this line of thought, I began to notice from my comforts of my car that more and more newer bikes and scooters that appeared on the road were largely from Honda and to a certain extent Bajaj. My scanning eyes would rarely notice a Hero bike or scooter.
My second order thinking was telling me that this was clearly availability bias coupled with reinforcement bias playing out where the brain was scanning for data to confirm a decision that was already taking shape in my mind. It knew that Hero’s strength was largely in 100 cc segment and it never had a strong foothold in the urban landscape where the competition was stronger. So logically the second order thinking should have prevented the first order thinking from garnering any fresh data points. But to the surprise of my second order brain, I was still not able to stop looking out of the car window trying to notice the increasing number of Honda vehicles on the road. Though I was rationally able to think that I was being irrational, it didn’t help take away the irrationality.
I did finally sell Hero Motocorp around the 1950 levels and exited the position. Till date my third order thinking is not able to reconcile the inability of the first and the second order thinking to merge together. If all this sounds confusing, well it reflects the confused state of my mind :-).