Self-serving Bias in Driving

Owning Berkshire Hathaway (BRK) means taking a sizeable position in automobile insurance through BRK's ownership of GEICO. The possibility of self-driving cars concerned me because it seemed that car insurance would be radically changed or even eliminated. However, as I reflect more deeply, automobile insurance is likely to stay as well as become a critical participant in the adoption of the technology. 

Self-driving cars concern most of the people I talk with, but I find myself eagerly awaiting their arrival. Initially, I viewed this difference as based in my dislike for driving. Again, further reflection revealed a superficial analysis. The reality goes back to studies from decades ago that showed drivers, on average, viewed themselves as better than average drivers. I thought to myself, "am I better or worse than other drivers on average?" At first, I reflected on my age and my aptitudes and concluded that I had better than average possibilities. But further analysis revealed my propensity to talk on the phone, work on my computer and change cassette tapes while driving. Those patterns were rooted in my overconfidence on the road - making me a worse than average driver. That's when I gave up, for the most part, driving.

A friend of mine says "we are all the center of our own universe" which is the root of our self-serving bias. It's weird to have such a maladaptive mechanism that would cause us to overestimate ourselves in a setup for worse outcomes. I've come to believe that this self-serving bias feels so good in its "rose colored glasses" effect that we are all wearing those glasses. Self-serving biases are a kind of first generation augmented reality glasses that can also be called "the Lake Wobegone effect," "the overconfidence bias" and even "free will." I used to think it populated more with men, but now I think it's topical and affects everyone after talking with mothers and fathers about their children.

The beauty of insurance companies is their focus on statistical analyses. Insurance companies are the likely proponents of self-driving technologies because they will reveal the statistical advantages of self-driving. There is no question that self-driving cars have and will have a lower likelihood of accidents, but people will be reluctant to embrace that improvement as long as they maintain the bias that their own capacities will cause them to defeat these odds. It will require the insurance company's pricing mechanisms to shape the consumer's sense of paying a higher price for the "right" to beat the odds.

"Non-Budget Budget" - Individuals and Companies - POOL jumping in

Years ago I met with a client couple and asked them to prepare a budget, but I offered them a shortcut. I said that people spent the maximum allowed. So, rather than itemize, they could simply look at the increase in savings during the past year and that number would tell them what they had actually spent. If there were no increase in savings, then their take home income was their budget.

Because the husband was a prominent business consultant and a business school professor, he argued that my thesis might be correct in general, but certainly did not apply to them. I didn't argue because the customer is always right, but at the beginning of the next meeting he showed me a new folder titled "non-budget budget." He expressed his shock as he discovered that not only had my thesis been correct for the past year, but for the years prior as well.

In reviewing the 2021 annual report for Pool Corporation (POOL), I am reminded of how this tendency also shows up with companies. POOL has an outstanding business with "compounder" tendencies - meaning there are two or more growth areas going on. In POOL's case, there is the increasing cost of maintenance and repair as well as the increasing build out of pools driven by the migration of US citizens from North to South.

However, 2021 was eye-popping in its results. New pools, new refurbishing and updates in maintenance and repair all combined to create a strong top line growth of over 25%, while the operating leverage allowed for margin expansion and operating income to increase by close to 50%. Standing back, these results are likely to be a pull forward in demand - meaning that results will be tepid for the next few years. Ask the folks at Netflix how that feels.

An appropriate approach might be to recall the biblical practices of Joseph with the seven fruitful years. However, POOL made a sizeable acquisition by leveraging its balance sheet and likely paying top dollar for it. This pattern of "non-budget budget" of publicly traded companies shows up just as consistently as the ones I saw in individuals. Perhaps AI systems could be developed to help management with this "money burning a hole in my pants" problem.