The complexity trap: why collective intelligence makes better investments

In 2001, an experiment by social psychologists Richard E. Nisbett and Takahiko Masuda revealed something profound about human perception.

Two groups – one from Japan, one from the United states – were shown footage of an underwater scene. The Americans overwhelmingly noticed the fish; observed the colours, sizes, numbers. The Japanese, in contrast, focused on context; commenting on the rocks, shells and plants in the backdrop. Then the two groups were shown another film: same fish, different context. The Japanese, completely thrown by the change of scene, struggled to recognise the fish. The Americans, placing the fish immediately, were almost completely blind to the change in the backdrop.

Until that point, prevailing wisdom held that human thought was governed by universal cognition: a single set of underlying mental processes, as common to remote tribes as to urbane city workers. Instead, we learned that even our most basic interaction with the world – the act of seeing – is a product of culture. Culture, shorthand for distinct experiences and ways of seeing, creates cognitive diversity. Thus the individualistic Americans observe the fish; the Japanese, from a powerfully collective culture, concentrate on context. The crucial point is that neither group is wrong; both groups grasped important parts of the overall picture. Yet only a combined view, which draws on the power of cognitive diversity, can overcome their glaring blindspots.[1]

Complexity is the defining feature of today’s world. The problems of the past – the moon landing, for example – were mighty, but largely linear. They could be solved by like-minded teams in possession of binary skillsets which produced correct calculations. Today’s complex problems, as Matthew Syed observes in Rebel Ideas: the power of diverse thinking, ‘require multiple levels of insight and therefore require multiple points of view.’ One view, however competent, will never bring the multi-level insight needed to navigate our VUCA landscape; to anticipate the global interplay of existential risks, exponential technologies, and hyper-local dynamics which govern market behaviours at any given time.

For investors, this knowledge should be a clarion call which brings into even sharper relief the collective intelligence which must underpin our work. Even sharper, because this new paradigm comes swift on the heels of an era which unceremoniously dethroned the ‘rational man’ of enlightenment thought, and replaced him with a highly fallible, hot-headed human, chronically prone to bad decision-making.

The knowledge of our two-brain system, established by Daniel Kahneman and Amos Tversky, has revolutionised how we account for the contradiction between our higher-order capacity for complex calculations, and the emotional, fast-brain overrides – short-termism, loss aversion, risk aversion, etc. – which so regularly foil our better nature. The perception gap only gets wider with the cutting-edge research of neuroscientists like Anil Seth, whose work on human consciousness demonstrates the extent to which we are not analytical computers, processing empirical inputs into rational judgements, but prediction machines, retrofitting the world into the image we expect to see. Yet in markets which are existentially prone to dramatically over-estimate the role of individual skill versus chance (see, for example, the Norwegian experiment which in which a cow’s ‘selection’ of stocks outperformed professional fund managers[2]), and routinely reward overconfidence above caution, these crucial insights remain largely untapped, leaving fast-brain irrationalism to trample global markets with a shocking level of laissez-faire.

In recent weeks, as the aftershocks of Covid and deepening volatility have wreaked untold havoc on once-golden stocks, the fallacy of such blinkered approaches have been laid bare. The new normal, it appears, will not play by old rules. As noise intensifies, stocks tumble and panic sets in, the natural, human response will always be to doubt your position; crave the protection of group think; shelter among the wisdom of crowds. And thus a cycle of chaos ensues.

At Arisaig, collective intelligence – our need to see both fishes, and seascape – has always been our prerequisite to success. To identify rare, exceptional, Purposeful Growth businesses emerging markets, serving consumers with highly distinct needs and expectations, we depend on the multiple perspectives of an international, multi-generational, highly diverse team, deeply versed in local contexts and linguistic nuance. Our endurance investing approach, built on buying-and-holding a concentrated number of high conviction stocks requires us to strenuously stress-test investments from multiple angles, modelled over time. This approach is simply not possible using a single perspective – or a collective, yet homogenous, view. This is why, over 25 years, we have translated the diverse perspectives of our team into robust, gated processes of collective reflection, challenge and highly deliberative decision-making. For example, mindful of the effort-reward bias (our human tendency to see our efforts as proportionate to the outcome) which jeopardises analytical objectivity in time-heavy research, we practice ‘designated dissent’: selecting team members to argue the downside of an investment case – conducting a pre-mortem of worst-case scenarios – as well as analysts who argue in its favour.

In these strange and personally testing times, strong processes hold us fast when we falter as individuals. They hold us to account, prioritising the alignment of long-term interests with which we serve our clients even when the short-term case seems compelling and the decision to exit is hard. Divesting from an Indian, family-owned food and beverage company, for example – which had been making excellent returns while significantly improving its environmental and societal credentials – was the only tenable outcome once we established that the company was routinely being used to subsidise the family’s other, crisis-strewn business in a high-risk industry, fatally jeopardising the alignment of interests on which our partnership depends. Had our systems been less resilient, it’s feasible that the shorter-term case would have overwhelmed the long-term interest. More often, in our present reality, the opposite is true. Time and time again, these systems have been essential to meet our present volatility with the conviction to see through the noise, stand by our judgement, and capitalise where others do not. Accordingly, while ‘China Sell’ panic grips the markets, one of our biggest holdings is now a Chinese e-commerce business. Our rigorous research processes gives us confidence that, unlike competitors, this company is the master of its own destiny. This approach has never been more vital in enabling us to help our clients meet the profound risks and huge opportunities of a world increasingly split down an Eastern vs. Western divide.


[1] This is just one of countless examples recounted in Matthew Syed’s Rebel Ideas; The power of diverse thinking; John Murray, 2019




This material is being furnished for general informational and/or promotional purposes to professional investors only. The views expressed are those of Arisaig Partners and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact, nor should any reliance be placed on them when making investment decisions. This material does not constitute independent research and is not subject to the protections afforded to independent research.

The statements and views expressed herein are subject to change and may not express current views. Arisaig Partners makes no representation or warranty, express or implied, regarding the accuracy of the assumptions, future financial performance or events. Emerging markets are generally more sensitive to economic and political conditions than developed markets and may be more volatile and less liquid than other investments.

All information is sourced from Arisaig Partners and is current unless otherwise stated. Issued by Arisaig Partners (Asia) Pte. Ltd. Not for public use or distribution. Arisaig Partners (Asia) Pte. Ltd is licensed and regulated by the Monetary Authority of Singapore.

Sign up to request our research