The Illusion of Outperformance: Seeing Value Where There Is None

In a world saturated by comparisons, our judgments are rarely made in isolation. Contrast Effect Bias can lead investors to judge performance, valuations, and opportunities not on absolute merit, but relative to recent rounds — often distorting decision-making.?

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The Psychology Behind the Contrast Effect in Investing?

The human brain is built for comparison. When presented with two options in succession, we tend to judge the second option in contrast to the first, rather than on its own. This mental shortcut, while useful in everyday decision-making, can be treacherous in investing.?

In markets, this means that a moderately performing asset might look like a superstar fit, if it follows a poor performer or look like a dud if it follows a highflyer. Investors may overvalue or undervalue opportunities simply because of what came immediately before.?

This bias is especially prevalent during fundraising rounds, pitch meetings, or earnings seasons. After seeing a struggling startup, the next one with even modest traction can seem like a home run. Similarly, after a wave of overperforming assets, a healthy, sustainable return can feel disappointing.?

The Contrast Effect often pairs with other biases like The Anchor Effect and Outcome Bias, amplifying distortion in investor judgment. We tend to anchor to the most recent data point: a pitch, valuation, or market move and evaluate everything else against it. ?

At the same time, Outcome Bias can push us to judge decisions based on how things turned out, rather than the information available at the time. Together, these biases cause investors to overvalue what's simply better than before, rather than what's objectively strong.?

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?How Contrast Effect Bias Skews Investment Decisions?

1. Misjudging Startups Based on Pitch Order (10%)?

VCs evaluating back-to-back pitches often experience emotional swings. A lackluster presentation can make the next startup look more impressive than it truly is, especially if metrics or product maturity are only marginally better.?

2. Overreaction to Macro Trends (15%)?

Following a major market downturn or negative economic forecast, even neutral or slightly positive news can feel disproportionately reassuring. This may lead to premature bullishness or re-entry into risky positions.?

3. Country vs. Country Misreads (25%)?

Investors comparing economic data across EU countries may favor one nation over another not because of strength, but due to perceived weakness in its peers. For example, Spain’s moderate GDP growth might appear exceptional when compared to stagnation in Italy, even if it underperforms in broader context.?

4. Earnings Season Distortion (50%)?

During quarterly earnings, a company posting solid but unremarkable results may be seen as a disappointment if it follows a string of outliers. Conversely, a mildly successful earnings report may trigger overenthusiasm if it comes after weak reports in the same sector.?

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Strategies to Counter the Contrast Effect in Investing?

Understanding when you're reacting to contrast rather than content is key to better decision-making:?

1. Evaluate Each Investment Independently?

Use standardized checklists or scoring frameworks to judge opportunities on their own merit. Avoid comparing today's pitch to yesterday’s winner or loser.?

2. Pause Between Decisions?

Create intentional space between evaluations. Whether it’s five minutes between pitch decks or a day between portfolio reviews, this helps recalibrate your senses.?

3. Use Historical Benchmarks?

Judge performance and potential against long-term benchmarks, not recent anomalies. For instance, compare sector growth to a 5-year average instead of the previous quarter.?

4. Beware the “Wow Factor” After Weak Signals?

If something suddenly looks amazing, ask: "Compared to what?" That question alone can highlight whether you're falling into a contrast trap.?

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Final Thoughts: Stay Grounded in Absolute Value?

In investing, as in life, context matters. The Contrast Effect Bias reminds us that our perceptions are fragile, often warped by our recent experiences.?

To be a disciplined investor, especially in the nuanced landscape of EU markets, you must learn to see each opportunity clearly, free from the shadows cast by others. With the right tools and mindset, you can escape the contrast trap and make sharper, more rational decisions.?

About ACE Alternatives?

ACE Alternatives (“ACE”) is a tech-driven service provider for Investment Fund Manages in the Alternative Assets space. ACE’s vision is to redefine fund management by demystifying complexities and promoting transparency.?

Asset classes include Venture Capital, Private Equity, Private Debt, Fund of Funds, Real Estate, and more. ?With a proprietary tech platform and extensive industry experience of the team, ACE offers 360-degree tailored solutions for fund administration, tax and accounting, compliance and regulatory, ESG needs. The fintech was founded in Berlin in 2021 and has since established itself as one of the fastest growing alternative investment fund service providers in Europe. ACE is currently working with over 45 funds and steadily growing its customer base.?

Media Contact: Rhea Colaso?

For more information visit us at https://www.ace-alternatives.com/?

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Source:?

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

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