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No disrespect to Bill Ackman but I always like to look at this (real life) case study of Valeant Pharma. It is a 4 billion USD loss and so i think it should serve as better evidence than even all the "lab or social experiments" that (Nobel prize winning) academics conjure out. (I hope i am not suffering from any biases with this assumption!)
https://www.valuebuddies.com/thread-6821...#pid138419
With his brilliance and access to insiders (ex CEO Michael Pearson), it seems like he had everything to win and/or recover his prior paper losses, but eventually his "double down" didn't work and blew into a 4bil loss. Putting aside some of the business decisions that went wrong, some very obvious or potential behavioral mistakes that he, as an investor made:
(1) Ackman professed to misjudge Mgt's capability. Ackman was introduced to ex CEO Pearson in 2014 by a personal friend, who vouched for him. After looking at his track record and working with him for 1 year on the Allergan deal in which Ackman made big money from, could he have been blinded by the halo effect? What about over confidence?
(2) If Ackman had not doubled down, his final loss wouldn't have doubled as well. This is simple loss aversion at work.
(3) His options in the "double down" was designed to make sure that he would gain 10x if stock price rose back, resulting in an overall huge gain rather than simply break-even. Would it be a case of sunken cost fallacy? (Ackman had put in some much efforts in this investment and so "breakeven" is not good enough, he had to make money)
(4) There were other well known personalities (eg. John Hempton, with whom he had some sort of well-publicized exchanges) at the other side of the trade. Could the green eye monster "envy" be at work?
https://www.valuebuddies.com/thread-6821...#pid138419
With his brilliance and access to insiders (ex CEO Michael Pearson), it seems like he had everything to win and/or recover his prior paper losses, but eventually his "double down" didn't work and blew into a 4bil loss. Putting aside some of the business decisions that went wrong, some very obvious or potential behavioral mistakes that he, as an investor made:
(1) Ackman professed to misjudge Mgt's capability. Ackman was introduced to ex CEO Pearson in 2014 by a personal friend, who vouched for him. After looking at his track record and working with him for 1 year on the Allergan deal in which Ackman made big money from, could he have been blinded by the halo effect? What about over confidence?
(2) If Ackman had not doubled down, his final loss wouldn't have doubled as well. This is simple loss aversion at work.
(3) His options in the "double down" was designed to make sure that he would gain 10x if stock price rose back, resulting in an overall huge gain rather than simply break-even. Would it be a case of sunken cost fallacy? (Ackman had put in some much efforts in this investment and so "breakeven" is not good enough, he had to make money)
(4) There were other well known personalities (eg. John Hempton, with whom he had some sort of well-publicized exchanges) at the other side of the trade. Could the green eye monster "envy" be at work?