The Strategy Dilemma – Overshooting And Undershooting

I clearly remember my first landing practice in Fighter Pilot course. My flight instructor demonstrated the pattern around the airbase from take off, upwind, crosswind, downwind, base and final approach to landing. He then handed the control over to me. My first approach to landing the plane was a huge overshoot. I was so surprised that in my next attempt, I seriously overcorrected. My second approach resulted in a substantial undershoot. We needed to push the throttle hard to get to the runway and not land in the sand, six hundred yards short. Apparently, I was not very original in my miscalculations. In fact the Overshoot—Undershoot error seems to be a pattern for most people on many fronts. Perhaps it is human nature or the nature of our brains. I was reminded of my overshoot – undershoot landing experience by Paul Saffo, Six Rules for Effective Forecasting, July 2007 edition of Harvard Business Review who writes:

“Ironically, forecasters can do worse than ordinary observers when it comes to anticipating inflection points. Ordinary folks are simply surprised when an inflection point arrives seemingly out of nowhere, but innovators and would-be forecasters who glimpse the flat-line beginnings of the S curve often miscalculate the speed at which the inflection point will arrive. As futurist Roy Amara pointed out to me three decades ago, there is a tendency to overestimate the short term and underestimate the long term. Our hopes cause us to conclude that the revolution will arrive overnight. Then, when cold reality fails to conform to our inflated expectations, our disappointment leads us to conclude that the hoped-for revolution will never arrive at all—right before it does.”

In essence this is the pattern behind every boom and bust cycle. Here is what Richard Russell author of The Dow Theory Letters says about this: “In all history, stocks have always been subject to two major forces. These two forces are as follows – the first force is the one that takes stocks ever-higher to overvaluation. The second force is the one that reverses at the top, and then takes stocks down to undervaluation. How stocks get from undervaluation to overvaluation and then back to undervaluation, that’s what we struggle with. We call the move from undervaluation to overvaluation a primary bull market. We call the journey back to undervaluation a primary bear market.”

Luckily I’ve learned to land the Fuga and then the Skyhawk safely and had many good landings with an occasional little undershoot or overshoot. Still, I observe all around me the tendency of people to vacillate from over optimism to over pessimism. The auto industry followed this pattern in the early 20th century with companies appearing like mushrooms after the rain. Later, the story became how most of them failed and went bankrupt. Then, within a few years the Big Three (GM, Ford, Chrysler) had taken on a much bigger chunk of the American economy than anyone could have imagined just few decades earlier. The same identical pattern played out in the dot com bust.

Where is the cycle now? Are we now in an overestimating or an underestimating phase? What is mass psychology underestimating or overestimating today? Where are you overshooting or undershooting? Here are 10 areas to reflect on:

1. Internet 2.0 – How will it change the nature and character of participative democracy? Are you underestimating the long term societal and geo-political change the Internet will bring?
2. The Chinese Dragon – are we in the overestimation phase to be followed by a bust of the Shanghai stock market? Or is mass psychology underestimating the power of the dragon?
3. The Indian Tiger – is the tiger’s ability to catch up with the dragon underestimated?
4. The Commodities Bull market – Started in 2001 but is it still in its infancy?
5. The crash of the dollar – is its impact and future deterioration underestimated or overestimated at this time?
6. Peak Oil – is the energy crisis and peak oil an underestimated challenge? Are the innovation and economical opportunities these challenges will unleash under or overestimated?
7. The Golden Years – are we over or underestimating the societal transformation and the redefinition of the golden years by the Boomers entering the fourth phase of life:
   1st: birth to 21
   2nd: 21-42
   3rd:42-65
   4th: 65-105
8. A New, “New Age” – What is the power of new pragmatic and integral idealism that is beginning to appear with young people all around the world?
9. Peace in the Middle East – Is the possibility of peace and its power to transform the region and the whole world over or underestimated?
10. Latin America – Is it currently highly underestimated in its social, economic and spiritual power?

Please add and share your thoughts about what we might be over or under estimating at this time.

© Aviv Shahar