Frequency is an illusion

I noticed a friend humming the tune to âAlors on danseâ this week. I was surprised he was into French pop music, especially a song from around a decade ago.
But when I said that, I got a blank look. And his reply, âItâs only just out, itâs huge on TikTokâ confused me even more.
Itâs true itâs making the rounds on the app now but I knew it from my language lessons at school. He couldnât believe it hadn't just come out.
See it once, see it everywhere
I had a similar feeling when I went with a mate to buy a Ford KA recently. I hadnât seen one in years but the roads are full of them now. The wee bubble-mobiles must be really making a comeback.
Except that they arenât. Ford stopped making them in 2019 and the only reason I thought there were more popping up was because I was more receptive to noticing them after my tyre-kicking trip.
The same is true of the funk Français. It came out in 2010 but my friend was so sure it was brand new because he only started to hear it everywhere after he encountered it online.
The illusion of frequency
The Baader Meinhof effect, or frequency illusion, describes the tendency for people to view the world only through their own experience as opposed to realising theyâre part of a much larger narrative.Â
It's the difference between something actually happening a lot and us only starting to detect something thatâs always been there.
If I mention red cars, I challenge you not to pick up on all the red ones you see on the road and, at least initially, think thereâs more than usual.
There arenât, youâre just primed to notice them now.
Itâs actually named after a West German leftist militant group that a journalist couldnât stop noticing after he saw it mentioned in the press. If the theory works, youâll start noticing it everywhere too.
Why does the Baader Meinhof effect happen?
A lot of it has to do with us thinking our perception of the world around us is the only possible version of life out there.
We arenât intentionally self-centred, itâs just natural to think that whatâs new for us is new for everyone.
And sometimes we get it right.
Trends do emerge and bleed into the wider consciousness, within a sector or even the general public. SPACs are a good example.
If you thought they came out of nowhere in the past few years, well they pretty much did.

But, quite often, we build our own hype out of nothing more than our own recently-heightened sensitivity.
Did someone mention a âhotâ stock to you recently? You might start to see it everywhere and mistake your own bias for the companyâs rapid emergence. The road to investment purgatory is paved with cognitive biases like these.
Is frequency illusion always clouding our judgement?
Not necessarily, which is even more annoying. At least if it was always happening weâd know to catch it (even if actually doing that wouldnât be straightforward). No, just to rub salt in the wound, we donât know when itâs flaring up.
If youâve suddenly seen grocery delivery services like Gorillas, Getir, Weezy, Gopuff and Dija (sounds like a hip-hop group full of PokĂ©mon) appear, then youâd actually be right in assuming itâs a new sector for everyone.
But the point is we canât tell from the face of it which trends weâre spotting and which were in full flight regardless.
So how can we identify when itâs affecting us and tackle it?
The antidote to the frequency illusion is hard data. The numbers donât lie and if youâre looking for early-stage companies to invest in, the last thing you want to realise is that itâs not actually early-stage at all.Â
That proof is obvious to anyone willing to look into a firmâs accounts and evolution up until now.
So the answer is really to research your way out of any possible bias or heuristic weighing on your decision-making.
Start with the hunch, then do the research
A classic example of using research to get rid of the frequency illusion comes from Peter Lynchâs deep dive into La Quinta Motor Inns.Â
Weâve spoken about Lynchâs investment process before and it really is the gift that keeps on giving.Â
During a phone interview with a boss at United Inns, Lynch asked which competitor was the most successful.
It was the first time he had ever heard of La Quinta and, even though he had an idea the budget hotel sector looked ripe for a turnaround, he didnât immediately buy the shares.
To minimise the bias he was feeling at the excitement of unearthing a gem, he delved into why the VP at United was so impressed by them.
It turned out La Quinta was able to offer Holiday Inn-quality rooms, beds, bathrooms and even pools but for 30% less.
It could bring prices down because it didnât offer the wedding, conference and restaurant facilities other chains did.Â
It figured that most hotels lost money on their restaurants so why offer one? Installing a franchised Dennyâs right next door gave customers somewhere to eat and didnât punish the balance sheet.
Itâs this type of work after the initial hunch that can turn an off-hand comment into a genuine investment thesis.Â
Lynch heard about it on the grapevine, like so many ideas we see online every day. But boy did he get into the weeds before he decided it was time to invest.
He knew he really had spotted an emerging opportunity when he saw only three analysts were covering the stock and less than 20% of shares were owned by big institutions.
This is what it means to minimise the Baader Meinhof effect - building up your own view of the stock, based on nothing but the facts.
Manage behavioural bias, donât try to get rid of it
We have the primitive parts of our brains to blame for wanting to create patterns where there arenât any or act rashly in the face of pressure situations.
We shouldnât be too quick to want rid of them though. After all, the blast of a car horn doesnât need a pros and cons list on what to do next. Thatâs when we rely on that basic instinct.
But we should look to mitigate emotional or clumsily-reasoned thinking when it comes to making long-term decisions for our portfolios.
That stone age brain will hate me for saying it but there really isnât a quick fix to all of it apart from delving into the detail and reducing its effect step by step.
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- General Investment Account
- A great way to try Freetrade before transferring your ISA or pension
- Unlimited commission-free trades. Other charges may apply.
- Trade USD and EUR stocks at the exchange rate + 0.99% FX fee
- Access to a selection of Freetradeâs 6,200+ global stocks and ETFs
- 1% AER on up to ÂŁ1,000 uninvested cash
- Fractional US shares
- Access to mobile app and web platform
- General Investment Account
- Stocks and shares ISA
- Access to 6,200+ global stocks and ETFs, including gilts
- A lower FX fee of 0.59% on non-GBP trades
- 3% AER on up to ÂŁ2,000 uninvested cash
- Early market access with pre-market trading
- Automated order types, including recurring orders
- More stats and analysis, including analyst ratings and EPS estimatesÂ
- General Investment Account
- Stocks and shares ISA
- Personal pension
- A lower FX fee of 0.39% on non-GBP trades
- New! Access to mutual funds
- Priority customer service
- 5% AER on up to ÂŁ3,000 uninvested cash
- Free, same day withdrawals