Contents

COGNITIVE BIAS

What is the Neomania Bias?

Published date:  16 December 2024   |  5-Min Read

Imagine the thrill of discovering an idea so fresh, so groundbreaking, it promises to change everything. It’s disruptive, exciting, and has the potential to reshape entire industries. Headlines proclaim it the next big thing. Investors scramble to get in early, convinced they’ve found the future. The narrative of innovation is irresistible it feels like being part of something truly historic.

But then, the cracks begin to show. The once-revolutionary concept struggles with scalability, unable to bridge the gap from idea to execution. Risks that seemed minor in the haze of excitement now threaten its viability. Competitors, quietly relying on proven methods, steadily advance building reliable, sustainable success while the shiny new idea falters.

This phenomenon is called Neomania Bias: an almost compulsive fixation on novelty that blinds us to the importance of practicality, resilience, and long-term value. It’s a powerful force, particularly in industries like venture capital, where the chase for innovation often overshadows critical evaluation. While the allure of the new drives progress, unchecked neomania can lead to missed opportunities, wasted resources, and preventable failures.

Neomania, or nophilia, is a cognitive bias characterized by an excessive enthusiasm for novelty. Individuals affected by this bias tend to favor new ideas, products, or experiences simply because they are new, often overlooking the value of established or proven options. This inclination can manifest in various domains, including technology, fashion, and notably, investment decisions

In industries like venture capital, private equity, and alternative assets, this bias often manifests as an overemphasis on emerging trends, flashy technologies, or innovative business models, frequently at the expense of established opportunities with consistent returns.

Investors may fall into this trap by prioritizing acquisitions in trendy sectors without fully assessing the scalability or resilience of these businesses under different market conditions.

As a result, they overvalue novelty while overlooking the enduring stability and long-term value of proven strategies and assets.

Neomania bias doesn’t act alone. It’s often amplified by other cognitive tendencies:

• Groupthink: The tendency to follow the crowd, leading to irrational investments in trendy assets without proper analysis.

• Scarcity Error: Overvaluing perceived exclusivity, driving impulsive decisions fueled by FOMO.

• Illusion of Skill: Overestimating one’s ability to predict success, mistaking luck for superior judgment when chasing novel ideas.

Novelty and Innovation: The Key Difference

The terms novelty and innovationare often confused, but they’re fundamentally different.

Novelty introduces something new, often incremental, that enhances appeal but doesn’t transform functionality or market dynamics.

Innovation creates something new that is valuable and transformative, reshaping markets and delivering lasting impact.

Recognizing this distinction is critical for building sustainable value. Innovation drives progress; novelty alone can be a distraction.

To steer clear of speculative bubbles and mitigate neomania bias, focus on high-quality companies with these attributes:

Proven Profitability

Investors should focus on companies that demonstrate consistent profitability over time. This can be assessed through metrics such as net income, return on equity (ROE), and profit margins. Companies with a strong track record of earnings not only indicate financial health but also suggest resilience during economic downturns. For example, firms like Johnson & Johnson have maintained steady profitability through diverse product offerings and effective management strategies.

Strong Free Cash Flow

High-quality companies typically generate strong free cash flow, which is essential for funding operations, paying dividends, and reinvesting in growth opportunities. Free cash flow indicates that a company has sufficient cash left after capital expenditures to support its business activities and return value to shareholders. Companies such as Visa exemplify this characteristic, as they consistently produce substantial free cash flow, allowing them to invest in innovation and return capital to shareholders.

Sustainable Dividends (or Disciplined Capital Allocation)

Investors should also look for companies that offer sustainable dividends or demonstrate disciplined capital allocation strategies. Sustainable dividends reflect a company’s ability to generate consistent earnings and return a portion of those profits to shareholders without compromising future growth. For instance, Berkshire Hathaway may not pay traditional dividends but instead reinvests profits into high-quality acquisitions and businesses, demonstrating a commitment to long-term value creation.

Conclusion

While the appeal of the new is undeniable, neomania bias can lead us astray if left unchecked. By developing a more measured approach to decision-making, we can strike a balance between embracing innovation and valuing time-tested solutions. This mindset not only mitigates the risks of neomania bias but also fosters more thoughtful, effective progress in both personal and professional realms.

Sources:

Rolf Dobelli, “The Art of Thinking Clearly” (2013)

Rhea Colaso Media Contact

Rhea Colaso

VP of Experience, ACE Alternatives

About ACE Alternatives

ACE Alternatives, a leader in managed services for the Alternative Assets sector, specializes in venture capital, private equity, fund of funds, private real estate, and more. Leveraging tech-driven processes and extensive industry experience, ACE offers tailored solutions for fund administration, compliance and regulatory, tax and accounting, investor onboarding and ESG needs.

Our vision is to redefine fund management standards with data-driven processes, combining advanced technology with deep industry knowledge. We are committed to demystifying complex fund operations, promoting transparency, and achieving sustained growth across the fund lifecycle.