The Boiling Frog Syndrome

Recently I had attended a Behavioural Finance and Value Investing course through Flame Investment Lab, where I had come across the term 'Boiling Frog' syndrome.

The 'Boiling Frog' syndrome is based on an urban legend describing a frog being slowly boiled alive. The premise is simple: if a frog is suddenly put into a pot of boiling water, it will jump out and save itself from impending death. But, if the frog is put in lukewarm water, with the temperature rising slowly, it will not perceive any danger to itself and will be cooked to death.

Why?

Since the frog is only slightly uncomfortable with its warm surroundings, it keeps trying to adjust and get accustomed, making itself believe that the slow, gradual change in temperature is normal. Only when the slow change suddenly starts accelerating does the frog realise it just signed its own death warrant. It has already lost its strength to jump out!

"The problem is that the human equivalent of the 'Boiling Frog' syndrome is observed more commonly than we'd like to admit."

The problem is that the human equivalent of the 'Boiling Frog' syndrome is observed more commonly than we'd like to admit. For example, your significant other who sees you on a daily basis does not realise that you've been putting on weight, but your distant relative whom you see once in a blue moon will be quick to notice the added fat around your belly!

Probably the most fitting model of the 'Boiling Frog' syndrome is evolution. To demonstrate how the process of evolution is similar to the process our frog was going through, let us consider the stages it occurs in (do keep in mind that I am not a biologist and I am merely trying to explain a point in simple terms!):

1. Offspring are born and resemble their parents – because of the transfer of genes during reproduction.
2. Yet, in rare cases, there is an imperfect transfer of genes – causing mutations. This imperfect transfer is random amongst species and does not necessarily target a specific genetic trait.
3. The changing environment then plays a role – where it helps some 'mutated' species to flourish, while the 'normal' ones find it difficult to survive and start dying out. The environment also becomes a factor for certain mutations to occur during reproduction, targeted towards ensuring that the species does not face extinction.
4. The mutated species that endure continue to pass on those genes to their offspring – and the cycle keeps on repeating for millennia...we arrive at the conclusion Darwin had discovered for himself through his extensive travels and observations.

The very concept of 'survival of the fittest' depends on the 'Boiling Frog' syndrome – where those who do not notice and respond to the gradual changes in the environment are the first to die. Yet, those 'trivial changes' amongst species became the cause for their survival – and over millions of years resulted in the evolution of chimpanzees into us homo sapiens!

Our journey of evolution. Source: Project Homo Sapiens

For most of you who have been following on until now, there is a lesson here! But before we get to the "moral of the story", I would like to address how this syndrome applies to the business world.

There are multiple 'boiling frogs' that we come across in business:

• People who lost millions in the stock market crash because they failed to observe negative signs in the economy, until the changes started accelerating and led to a global recession (2007-2009: the credit crisis resulting from the housing bubble burst).
• Businesses who failed to acknowledge the innovative competitors that offered substitute products to attack their 'moats' – from business cards vs. LinkedIn to Kodak film vs. digital cameras, from atlas books vs. Google Maps to Myspace vs. Facebook, from BlackBerry vs. Apple to...you get the point.

It is easy to look back at these situations (that are now MBA case studies) and point out the very obvious signs that should have been an immediate cause for concern. If any of these businesses had continued to innovate, stay ahead of the competition, do some course-correction, and not become 'boiling frogs'...the story would have been very different.

"If any of these businesses had continued to innovate, stay ahead of the competition, do some course-correction, and not becoming 'boiling frogs'...the story would have been very different."

A similar connection to the 'Boiling Frog' syndrome is made in favour of long-term value investing over short-term trading – the slow, gradual increments that suddenly accelerate are seen as compounding of value. This is what Warren Buffett, Charlie Munger, and a dozen other famous value investors preach as their secret recipe of successful investing and money-making – how these relatively small returns on investment turn out to grow your net worth exponentially over time!

The timeline of Warren Buffett's networth is strikingly similar to what a graph of compound interest looks like! Source: Value Walk

And finally, the moral of the story:

Most of us become so comfortable and used to our current situation (the lukewarm water) that we don't even recognise the need to escape from it (the gradually increasing heat). Don't put up with the rising temperatures, never settle, and act sooner rather than later!

Here's a video of the 'Boiling Frog' for you to watch. Don't worry, no frogs were actually harmed in making it!

"Don't put up with the rising temperatures, never settle, and act sooner rather than later!"

The Theories Surrounding 'Boiling Frog' Syndrome

For those more interested in the sociological and more technical aspects: the boiling frog syndrome is invoked in support of a 'slippery slope' argument (a consequentialist logical fallacy which deems that a comparably small step causes a chain of events that lead to a significant effect – mathematicians refer to this as the 'butterfly effect'). The syndrome is also used as a caution against 'creeping normality' (accepting a significant change as a normal situation since it happened due to slow, unnoticeable moments of change).

Philosophy also illustrates the 'Boiling Frog' legend through the 'sorites paradox'. The 'sorites paradox' talks about a theoretical heap of sand from which one grain is removed at a time. The paradox then suggests if the remover can identify a specific point in time when the original grains of sand can no longer be defined as a heap. The point made is the same as the 'boiling frog': it is extremely difficult to tell when slow, gradual changes become monumental and cause a significant effect – just like the slowly changing temperature was not obvious to the frog until it boiled the poor animal.

Do share your thoughts and questions on this article, and I would love to hear about more real-world examples (either personal or general) of the 'boiling frog' syndrome!