Daniel Kahneman & Poor Cannabis Decision Making “The illusion that we understand the past fosters overconfidence in our ability to predict the future.” Daniel Kahneman A giant in the fields of economics and cognitive psychology passed away last week. Born in Israel, Holocaust survivor and American-based, Daniel Kahneman was a pioneer in the field of behavioral economics (BE) and the author of the best seller, ‘Thinking Fast and Slow.’ Understanding Kahenman’s research can help explain why early cannabis firms went off the rails so spectacularly, why some companies still don’t seem to get it right and why the next generation of emerging market canna-enterprises will likely repeat the same mistakes. I can reduce his BE thinking down to 3 insights: 1. Humans often make irrational decisions based on subconscious bias. This bias often leads them to act against their own interests; 2. Individuals can be blind to contradictory data and reality; 3. We often can’t recognize our own bias and blindness. Irrationality transcends the cannabis value chain, market and firm type. For example, > Your product is the best in the market. Now do a Pepsi-challenge with your competitive set. > The real market size and revenue opportunity is smaller than you want it to be. Hello German adult use legalization. > The time to profit & positive cash flow is quick. Sure, it is. You can chock up bad decisions to prosaic causes such as a lack of data, poor execution or plain bad luck. Still, I posit that there are elements of irrationality within the people doing the work. What is worrisome about DK’s conclusions is the propensity of individuals and firms to ignore new or contrarian evidence and repeatedly exhibit the same biases. Why does this happen a lot in cannabis? Our industry is vulnerable to cognitive traps, such as: A. Misleading Heuristics A heuristic can simply be described as a mental shortcut (e.g., a visual cue, memory, signal) that enables our brain to process information and make decisions i.e. quickly jump to conclusions. Heuristics create bias, hide blind spots and rush decision making. B. Fake Experts Cannabis is chock full of faux messiahs who don’t know as much as they purport to know. Furthermore, some executives will hire well-known but clueless, big consulting brands, hoping that the name brings a patina of credibility to their plans in the eyes of their Boards, regulators and investors. The high fees create a sunk cost bias driving the executive to follow advice they may know intuitively know (or their team knows) is wrong. C. Leadership Hubris Vanity has been a big part of the human condition since time immemorial. Over-the-top ego cuts across the organization, ranging from the Master Grower to the CEO, leading to groupthink, rushed judgements and subjective decision making.

Posted by Mitchell Osak at 2024-04-02 16:23:07 UTC