Netflix Is On Tilt

Last month when $NFLX announced Qwikster, it seemed a bit like they might be on tilt.

I gave them the benefit of the doubt though because I could see the utility of the move. As Dan Frommer wrote then:

Why is this happening? Because the future of Netflix is streaming videos. Period. Not mailing them to your house via the U.S. Postal Service, but delivering them to your TV and devices over the Internet.

But now, just 3 weeks later, the company has announced that it is scratching plans to separate its DVD mail and streaming video businesses and both decisions seem more erratic and hurried.

Tilt is a term borrowed from poker that describes how a card player sometimes responds to one or a series of bad beats. When a player goes on tilt, he tends to increase risk and make poor decisions which lead to further and increased losses.

This occurs not only to amateurs but to pros as well and the concept has a sound theoretical basis in the behavioral finance literature focusing on loss aversion.

The basic idea is that losses affect players emotionally, producing anxiety and a compulsion to try to avoid loss realization. They want to make make up for it quickly instead of realizing it and maintaining sound tactics. The anxiety and compulsion then lead to poor decisions and, paradoxically, taking larger risks.

The phenomenon also applies nicely to traders who are losing money and helps to explain why guys blow up altogether soon after a losing series of trades.

But rarely is it so clear that a company is on tilt.

The catalysts for the hurried and high stakes poor decision making at $NFLX likely relate to this series of bad beats – 1. the loss of the Starz deal, 2. raising prices and the customer outcry which followed and 3 the precipitous fall of the stock price since July 13th.

Regardless, it now appears as if Reed Hastings and company are making hasty decisions motivated by emotions and loss aversion rather than smarts.

The solution is to take less risk and to delay big decisions until exectuives have regained cooler heads but this is much easier said than done.