Several years ago my wife and I decided to do our first multi-day hike along the Overland Track in Tasmania. Roughly 65km, the hike generally takes 6 days. There aren’t any re-supply points along the track so you must take everything you need with you. We’d never done anything like this before, not even a 1 nighter.
We were jumping straight into the deep end.
Peak season along the track runs from October to May. This is when it’s busy with up to 60 people allowed to start the hike each day. We didn’t want to be surrounded by other hikers, we wanted an ‘authentic’ experience of hiking alone so we decided to kick off in September. Despite being Spring in Australia, the Overland is an Alpine environment and weather can be volatile. We were coming from Brisbane, a sub-tropical climate where winter temperatures rarely dip below 5 degrees Celsius.
Mental Models and Changing Conditions
Day to day life is pretty complex. We’re flooded with decisions and social interactions that require a lot of bandwidth. Luckily our brains have come up with some handy shortcuts to help us deal with this onslaught. Behavioural economists call these shortcuts heuristics which allow us to make decisions in a short time frame despite imperfect information. Heuristics are really mental models of how the world works according to our perceptions.
My wife and I had a very limited mental model of hiking in cold weather. You could say that our model was not properly calibrated. We knew the distance and elevation of each leg and we’d planned our food accordingly. Our expectations of weather were based on historical averages, the standard deviation didn’t even occur to us.
We started the hike mid afternoon and immediately started encountering hikers coming back along the track. When we stopped to talk, they told us of heavy snow up ahead. They’d made the decision to turn around, however we kept climbing up Cradle Mountain.
Straight away, conditions were contradictory to our mental models, yet we didn’t adapt.
We eventually encountered the snow the other hikers had warned us about. The conditions slowed our pace considerably with snow completely covering the track markers. By this time, it was getting dark. We were cold and wet and feeling pretty miserable.
Then, looming in the dark was a rickety old structure called ‘Kitchen Hut’.
Officially an emergency shelter, we decided our situation met the criteria and decided to spend the night. We pitched our tent inside, got the stove going and opened a couple of cans of Guinness (one of many rookie errors – taking heavy cans of beer).
That night, our perspective changed. We realised the seriousness of the environment and were very fortunate to have found shelter. We’d adapted to the conditions and discarded our outdated mental model. From that point on, our new and improved model was calibrated to the conditions and we weren’t going to take any needless risks.
Coronavirus, Market Volatility and Survival
Your mental models are restricted to the conditions you have experience of. It’s very difficult to have a mental model that encompasses tail events like pandemic viruses. Remember, the last serious global pandemic was the Spanish Flu in 1918, 102 years ago.
We all need the ability to recognise when our models no longer conform to the environment in which we find ourselves. This skill can make a real difference not only to our financial position but our very survival when things go wrong. That’s one of the reasons I find economic regimes so valuable. Regime change signifies when the future is going to change. Historical analysis gives me a pretty good feel for how the market will behave under different regimes. If market activity deviates significantly from what I expect based on the current regime, something is amiss.
As the virus spreads and markets around the world attempt to price-in the economic consequences, it’s time to adapt. We should all recognise the current situation as a trigger to re-calibrate our mental models.