Durability Bias
It is a type of financial forecast that identifies how future performances are expected based on past performances.
Durability bias is a type of financial forecast that identifies how future performances are expected based on past performances.
Suppose a firm notices consistent growth over the years and assumes a durability bias for its performance. In that case, it may continue to provide its services to maintain that growth.
On the flip side, this type of forecast can deter a firm from growing exponentially. Moreover, sticking to the same practices each year can slow down a firm's performance as it can fall behind in economic changes and new consumer trends.
Different methodologies are necessary as the economy is constantly changing, and consumer needs are also changing.
More commonly noted in behavioral finance, this bias is also studied as a form of focalism. In the article, Focalism: A Source of Durability Bias In Affective Forecasting, the authors outline how current events blur the probability of future outcomes.
Without the consideration of future expectations, the outdated and repeated habits of a company can hold back the progressiveness of its returns.
Following the brief description of a single type of financial forecast, the article highlights a few examples of companies that have underperformed and overperformed over the years, as durability bias plays a role in the company's development.
Comparing Company Biases
Throughout the years, the world has witnessed the rise and fall of numerous companies through the development of their products or services. Unfortunately, a company's lack of progressiveness in operations or incorporating new ideas often leads to significant downfalls and, eventually, shutdowns.
For others, continuous advances in companies' missions helped them grow and expand their goods or services to keep up with emerging trends.
Let's take the example of Blockbuster, a company that relied on its durability bias. Blockbuster was once known for its renowned rental services of movies and video games, which offered various genres.
However, competing entertainment services such as Netflix and Hulu began offering more excellent services online with a broader range of movies and shows that overtook Blockbuster's products.
As a result, online entertainment services became known for their better qualities and conveniences that continued to outweigh the system at Blockbuster.
Without consistent reevaluations of company delivery, whether of product types or customer service, the company will eventually subside. As for Blockbuster, the lack of doing so drove the business downhill.
Remember to consider the key tactics for remaining a competitive company and outgrowing durability biases in business operations.
In contrast, an example of an outperforming company such as Apple would adapt to the dynamic economic needs.
Consistently over the years, Apple has added new and improved features to their products, including:
- iPhones
- Watches
- Laptops
- Headphones / AirPods
By doing so, Apple has reached new heights and grown its customer base by inviting new practices instead of using outdated mechanisms in a new environment.
In distinguishing the durability biases between the two companies, Blockbuster demonstrates a company that applied durability bias in their operations and presented its downfall effect in maintaining a competitive business within the industry.
Blockbuster launched as a robust video provider store but failed to adapt to the changing environments of technological advances. In return, the company could not compete with similar companies and newcomers in the industry.
As for Apple, the company noticeably executes new metrics to update its products to fit the needs of current and emerging economic trends.
In a growing technology world, modifying features to make product use easier for customers and gain long-term loyalty is vital for any company's survival.
Durability Bias: Summary
To conclude, durability bias is when a company reuses past performances for future practices, as forecasted, to produce similar or great results. If a specific product or service noticeably offers high-achieving outcomes, it is said that those practices should continue.
In most instances, continuing to use fundamental practices can keep a company afloat, but it cannot be the only source of maintaining exceptional results.
Every company has unique methods of delivering products, services, and operations, but all must understand the competition within each industry.
Some practices from the past can continue to propel a company’s worth, while other tactics can be outgrown. Identifying practices that have or can improve company performance in competition with others is essential in maintaining growth.
Moreover, additional biases can be practiced in financial forecasting. Finally, the influences of cognitive biases can influence the decision-making of industry professionals, similar to the acts of durability bias.
Other cognitive biases include
- anchoring bias,
- overconfidence bias,
- realism bias, and
- representative bias.
A frequently noted similarity between these four biases is their errors in overestimating or underestimating future performances from current activities.
Without looking at the bigger picture, future outlooks can be swayed to narrow down to one’s interest or point of view, whether from an individual professional or a company.
As stated, customer needs change, the economy shifts, and new times call for further developments. Therefore, this bias can be a setback for a company in achieving progressive, onward-looking goals.
Learn more about the valuation process as well as benchmarking and transactional practices of various companies with our unique courses offered at Wall Street Oasis.
Researched and Authored by Caira Sotingco | LinkedIn
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