Lindy Effect & Stock Market

Investors often look at various theories to understand and predict stock market behavior. Lindy Effect is one such theorised phenomenon which helps explain certain aspects of choosing stocks. Shreya Chaware deep dives into the Lindy Effect and deliberates on whether it can be useful in the investing process

- Shreya Chaware

It is always interesting to analyze the success of some of the world-class portfolio managers such as Warren Buffet. Investors often attempt to replicate the portfolio strategy of the winners with the simple objective of beating the markets and it is no secret that a majority of investors put in a lot of efforts to understand how Buffet picks his stocks. If you are one of those investors who are eager to understand how he processes his investment decisions and if you were told he consciously or subconsciously uses Lindy Effect in his investment - you would want to know more about this enigmatic phenomenon.

While Buffet has never claimed to use Lindy Effect in his investment decisions, his manner of stock selection supports its thesis. So, what is Lindy Effect, and can it be useful in the investment game? Simply put, Lindy Effect suggests that the life expectancy of a non-perishable item is proportionate to the past life of the item. The concept of Lindy Effect, even though an old one, came into the limelight when famous author Nassim Nicholas Taleb introduced the concept of Lindy Effect and its interpretation in his book titled 'Antifragile. According to Taleb, who is also famous for his book 'Black Swan', for the perishable, every additional day in its life translates into a shorter additional life expectancy.