How the “Hot Hand Fallacy” can ruin your practice value

When your practice has been stable, or on a growth trajectory for the past few years, it’s easy to start believing that it will always be like this. That tomorrow will always be the same as today and next year will be like this year. It is easy to start believing that the strength of your practice, and its valuation if put to market, is secure into the future. 

The ‘Hot hand fallacy’ is common cognitive bias among athletes, sports enthusiasts, investors, gamblers and business owners, where they overestimate the chances of ongoing success and hold on to a position longer than they should.

Examples of the “Hot Hand Fallacy” and its pitfalls are all around us:

• Great athletes who retire too late (like Muhammed Ali)
• Gamblers that keep betting because they feel like they are on a roll or a “hot streak” … suddenly finding that they have lost more than they could afford because their luck ended before their gambling did.
• People who had shares in Nokia or Kodak or Blockbuster Video, who thought that their market dominance would last forever.
• People who thought that the Chinese housing market or Australian mining boom would never wane.

AND….

• Business owners delaying the timing of their sale until after the business and its valuation have been compromised.

Unfortunately, as successful as your business is and has been…:

1. … The chances are, someday, it probably won’t be.  That shouldn’t be taken as a reflection of you as a business owner. Most businesses fade over a long enough time horizon, and the chances are that eventually some combination of health, time, competitor strength or the local and global economy will eventually trigger the decline of your business. To maximise your return on the practice that you have invested so much time and effort into… you need to sell and exit before this. 
2. …You may find that the great offer that you received a year or two ago may not be there when you’re finally ready to accept it. The supply and demand for the asset that is your practice changes over time.
   1. An increase in interest rates, the ease of bank finance or simply economic sentiment at the time can greatly influence the risk appetites of buyers.
   2. Buyer appetites for dental practices (particularly corporate buyer appetites) ebb and flow; their criteria of what they are looking for, what they will pay and under what terms changes.

Conclusion

When business owners believe their recent success is indicative of long-term prosperity, they may d delay selling at an optimal time. The “Hot Hand Fallacy” can lead to missed opportunities, misaligned exit strategies, and suboptimal business valuations. By recognising the fallacy, seeking professional guidance, and relying on objective data, practice owners can make more informed decisions and avoid letting the illusion of perpetual success cloud their judgment.