Durability bias definition
/What is Durability Bias?
Durability bias is the tendency to project the recent past into the future. The assumption is that recent trends are likely to continue, which is not necessarily the case. Recent occurrences may have been triggered by one-time events that are unlikely to recur, such as a major order from a buyer for a fashion item. Or, the billings under a large government contract have nearly consumed the original funding, after which the contract will be terminated. These issues are routinely overlooked by people, who prefer to extrapolate recent sales figures into the future without looking at the underlying trends. The same problem arises with investors, who tend to think that historical pricing for securities will extend into the future.
People can ignore durability bias on both the upside and the downside. For example, a company assumes that rapid sales growth will continue forever, and so makes the mistake of investing heavily in new production facilities to handle additional growth that turns out to never occur. Or, a business mired in a recession is operated in low-cost mode for too long, so that the firm does not have sufficient capacity to service customers when the recession eventually turns around and demand begins to increase.
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How to Deal with Durability Bias
To avoid durability bias, you must examine every component and assumption relating to a project or business, to see if the extrapolation is reasonable. Organizations that do the best job of avoiding durability bias constantly question their growth rate assumptions. They also pay close attention to leading indicators within their industries, to catch any hint of a change in the future direction. It can also be useful to review the forecasts of anyone with a deep knowledge of the industry for insights into likely changes in future directions.