Mental Biases At Work In Tesla/Edison Feud

Recently, discussion of biases, mental models, "thinking about thinking", etc. has become popular among investors. The theories are credible and examples are good. In sciences, theory sometimes precedes practice. In many situations this is a good way to go. In other situations, "doing is learning" seems more applicable (sports or applied sciences, for example, or when an accident or experiment gives the results first, and then you hunt for the theory). When it comes to behavioral finance, it's fun to read the theory and examples, but trying to spot biases in situations (our own or others') turns it into a more practical device than simply knowing the theory of what these biases are. 

I recently read about the rivalry between Edison and Tesla. The whole story is fascinating but one observation relevant to the topic of this post is that even Thomas Edison suffered from biases. Tesla meeting Edison and presenting a case for alternating current (v/s Edison's direct current) might sound something akin to Andrew Left visiting Bill Ackman to present a short case for Valeant in support of his employment application. But Edison was much more forgiving and actually employed Tesla, even though he did not believe in alternating current. How it all turned out (General Electric was later born out of this feud) is well known so I won't recount it here. But I think the presence of certain "influences" in the whole situation is worth commenting on.

Edison most likely had a blind spot when it came to AC. Tesla presented both theory and experiments, but Edison simply could not bring himself to believe that AC could work better than DC for transmission, despite AC’s high voltage. Edison had already built factories and power plants reliant on the DC model. JP Morgan’s investment in Edison Electric was already in tens of millions of dollars (in today’s dollars). The idea of scrapping that entire effort (as sunk cost) and retooling and rebuilding with AC equipment must not have been an easy one to digest. It doesn't take too much imagination to see what kind of commitment tendency might be at play when millions of dollars (in today's money) have been spent with a particular technology in mind. Even JP Morgan could not be convinced (yet). It seems similar to having been confronted by opposing evidence to one of your largest positions which is down about 35% (and hence is, now “simply too cheap not to own”). Keeping an open frame of mind ought to be difficult in this situation for anyone, including Edison and JP Morgan. So they avoided the evidence and persisted in trying to “beat” the AC technology.

As Representative Carter once said, “It would be the height of folly for us to defer action until it is forced upon us by the imminence of panic.” Yet, as is so often the case, Edison & JP Morgan did not espouse AC transmission until it was “forced upon them” by their losses at the World’s Fair at Chicago in 1893 and The Niagara Falls Power Project. Even so, Edison remained adamant. JP Morgan, having then kicked Edison out of Edison Electric, made the switch to AC power and used the Morgan “play book” of consolidating several electric companies to form General Electric. So, in the end, JP Morgan did cut his losses and ‘pivot’ to the better business. This rational behavior by Morgan, even though it came late, perhaps is one reason (among others) why he was much more successful in the electricity business than either Edison or Tesla.

As an aside, when Tesla quit working for Edison (and before he teamed up with Westinghouse), he had to support himself by doing odd jobs (such as being a ditch digger). Eventually, two investors hired Tesla to build some devices (and fired him after he had done his work). One of the governing factors behind them backing Tesla was that “he had worked for Edison”. This brings up another influence-tendency of ‘authority’, i.e. “If Edison thought he was good, he must be good”. Perhaps it’s a stretch, but does this not sound too similar to what goes on in the investment world with “Warren Buffett bought this…”, or “Such and such is a ‘Tiger cub’”, “s(he) worked at XYZ fund”, “This startup fund manager worked with Bill Ackman”, etc.?