The tools we use to analyse data play a pivotal role in shaping investment decisions. Is it possible that cognitive bias can creep in when we favour sensitivity tables over histograms? This article delves into the contrasting aspects of sensitivity tables and histograms, exploring their strengths and potential pitfalls.
The Power of Sensitivity Tables
Sensitivity tables are commonly used in the real estate industry to assess how changes in rental growth and exit yield can affect the return on an investment. They offer a structured and methodical approach that can be reassuring to investors. Essentially, sensitivity tables help us understand the potential scenarios that can impact our investments:
- If rental growth exceeds expectations or the exit yield is lower than anticipated, the investment may yield a higher return.
- Conversely, if rental growth falls short of expectations or the exit yield is higher, the return on investment may be lower.
However, we need to tread cautiously. While sensitivity tables provide valuable insights, there are potential pitfalls to consider. These tables can inadvertently lead to cognitive bias by emphasising a limited set of scenarios and variables, leaving little room for manoeuvre when considering the broader impacts on a portfolio. This tunnel vision can skew our perception of risk and diversification.
The Symmetry Illusion of Sensitivity Tables
One cognitive issue with sensitivity tables is that their symmetrical layout implies an equal likelihood of all permutations of rental growth and exit yield.
