The Backfire Effect

InvestmentABCs1If you were wrong about something important, how quickly would you want to know and how quickly would you want to do something about it? Unfortunately, the answer isn’t nearly as obvious as we’d like to think.

Mark Twain sagely noted that a lie can travel half way around the world while the truth is putting on its shoes. That’s because the truth is so much messier. Lies are created to be believable. They cater to our prejudices, whims, desires and hopes even when the truth cannot. Lies offer a good story when the truth does not. They are plausible when the truth is not. We often resist and even deny the truth. It is inherently unwieldy. It requires a careful sifting and analysis of facts in order to be discerned — we want deduction but are limited to induction most of the time. The truth is simply very hard to handle.

Of course, if we’re talking about relatively trivial matters (perhaps the distance from the earth to the moon) or about something we’re predisposed to believe anyway, we adjust our beliefs quite readily. But when truth doesn’t fit with what is important to us — when it matters — our perception of it gets caught up in who we perceive ourselves to be and in our vested interests. In those instances, attacking false information with data and related evidence often backfires, having the opposite of the desired effect. We like to think that straightforward education overcomes falsehoods, but things aren’t nearly that simple. This horrifying phenomenon — the backfire effect — was demonstrated once again recently in a study of the responses of parents to various forms of reporting that vaccines are not dangerous. Continue reading

Hope for the Future

HopeFutureNearly every high school choral organization routinely performs anthems based upon some version of a familiar trope. The piece is designed to be trendy musically, even while being more than a bit late (when I was in school, each had an obligatory “hard rock” section). Meanwhile, the lyrics are an earnest and perhaps cloying ode to the ability of the young to create a better and brighter tomorrow. One such title from my school days was in fact “Hope for the Future.”

Unfortunately, the promise always seems better than the execution.

Despite the enormous (and most often negative) impact that our behavioral and cognitive biases have on our thinking and decision-making, the prevailing view is that we can’t do very much about them. In his famous 1974 Cal Tech commencement address, the great physicist Richard Feynman emphasized the importance of getting the real scoop about things, but lamented how hard it can be to accomplish.  “The first principle is that you must not fool yourself – and you are the easiest person to fool.” Even Daniel Kahneman, Nobel laureate, the world’s leading authority on this subject and probably the world’s greatest psychologist, has concluded that we can’t do much to help ourselves in this regard.

But today — maybe — there might just be a tiny glimmer of hope (for the future). Continue reading

Who’s the Easiest Person to Fool?

RES_1213_AnnuityAnalytics_MI600-resize-600x338My December Research magazine column is now available online. Here’s a taste.

Innovation in financial planning typically starts with an idea. If enough people (or the right people) think it might be a good idea, it then moves to evidence-gathering for confirmation. But the entire endeavor—designed to try to confirm if the idea makes sense—is inherently prone to confirmation bias. We should be systematically and consistently looking to disprove the idea. Without a devil’s advocate with the specific mission to try to show why the idea is a bad one, without recrimination or criticism for doing so, many bad ideas will seem to be confirmed.

I hope you will read the whole thing.

Who’s the Easiest Person to Fool?

Too Sure By Half

Nobel economistsAll nine of this year’s American Nobel Prize laureates shared a stage this week. Not surprisingly, economists Robert Shiller and Eugene Fama sniped at each other, if good-naturedly. But it was the winners from the harder sciences who got the best digs in at the economists. Martin Karplus, a chemist from Harvard, queried, “What understanding of the stock market do you really have?” He even went so far as to note that economics – “if one wants to call it a science” – seemed completely unable to explain market movement. There were others, but you get the point.

The obvious takeaway is a common theme — that economics is conflicted flawed divided wildly inconsistent worthless, a point that has been made by Nassim Taleb, Jeremy Grantham and many others. The idea is that economics desperately wants to be a science, with “physics envy,” but simply isn’t up to the task. And it’s hard to contest the point.

My disagreement is not so much with the main point (even though I think academic economics has a good deal to offer, with Shiller’s work being Exhibit A in my evidence cache), but with its corollary and the casual certainty with which that corollary is expressed.  “Hard” scientists increasingly express a belief that their domain is the only bastion of reality available. They see a great divide between things we can know (science) and everything else, which is opinion at best and largely worthless. That the expression of it is so often humorless and irony-challenged makes it all the worse. Continue reading

Personal Bias

BiasedGrantland has an excellent long form piece up about the lingering racism of Valdosta, Georgia as it relates to the mysterious death of a young athlete there. The article is excellent and worth reading for multiple reasons. For our purposes, I was particularly struck by the following two paragraphs.  Continue reading

Data-Driven Difficulties

BiasedAs regular readers are all too well aware, I am committed to data-driven analysis and investing.  We’re suckers for stories, of course, and are ideological through-and-through, but the goal is to make sure that our investment decisions are based on real, quantitative evidence (at least to the extent possible). 

That’s easier said than done, of course.  We are prone to all sorts of cognitive and behavioral biases — perhaps most prominently confirmation bias — all of which threaten our analysis.  We are also highly susceptible to bias blindness, the inability to see our own biases even when others’ are crystal clear.  And now comes further evidence that our reasoning abilities are even worse than we thought. Continue reading

Paradigm Shifting

I grew up in the investment business in the early 1990s on the ginormous fixed income trading floor at the then Merrill Lynch in the World Financial Center in New York City.  It was a culture of trading and instant gratification. “What have you done for me lately?” covered no more than that day, often less. I frequently argued that we should consider the interests of our customers – among of the biggest investment managers, pension funds and insurance companies in the world – in our dealings so as to build long-term relationships and enhance longer-term profitability even if it meant making a little less in the near-term.

I got nowhere.

Liar's PokerWe called our accounts “clients” to their faces, and I thought of them that way, but they were customers at best and marks at worst to virtually everyone on the floor, and especially to our managers.  We didn’t call them “muppets” like the guys (and it was almost all guys then) came to at Goldman Sachs, but we may as well have. Our mission was clear.  We were to make as much money for the firm as we could as quickly as we could. Lunch was a long-range plan.  In his first and funniest book, Liar’s Poker, about our counterparts at Salomon Brothers, Michael Lewis got the tone, the approach and the atmosphere precisely right. Continue reading

The Tragedy of Errors

Lawn Chair LarryLarry Walters had always wanted to fly.  When he was old enough, he joined the Air Force, but his poor eyesight wouldn’t allow him to become a pilot. After he was discharged from the military, he would often sit in his backyard watching jets fly overhead, dreaming about flying and scheming about how to get into the sky. On July 2, 1982, the San Pedro, California trucker finally set out to accomplish his dream. But things didn’t turn out exactly as he planned.

Larry conceived his project while sitting outside in his “extremely comfortable” Sears lawn chair. He purchased weather balloons from an Army-Navy surplus store, tied them to his tethered Sears chair and filled the four-foot diameter balloons with helium. Then, after packing sandwiches, Miller Lite, a CB radio, a camera and a pellet gun, he strapped himself into his lawn chair (see above). His plan, such as it was, called for his floating lazily above the rooftops at about 30 feet for a while and then using the pellet gun to explode the balloons one-by-one so he could float to the ground.

But when his friends cut the cords that tethered the lawn chair to his Jeep, Walters and his lawn chair didn’t rise lazily. Larry shot up to a height of over 15,000 feet, yanked by the lift of 45 helium balloons holding 33 cubic feet of helium each.  He did not dare shoot any balloons, fearing that he might unbalance the load and cause a fall.  So he slowly drifted along, cold and frightened, with his beer and sandwiches, for more than 14 hours. He eventually crossed the primary approach corridor of LAX.  A flustered TWA pilot spotted Larry and radioed the tower that he was passing a guy in a lawn chair at 16,000 feet.

Eventually Larry conjured up the nerve to shoot several balloons before accidentally dropping his pellet gun overboard. The shooting did the trick and Larry descended toward Long Beach, until the dangling tethers got caught in a power line, causing an electrical blackout in the neighborhood below. Fortunately, Walters was able to climb to the ground safely from there.

The Long Beach Police Department and federal authorities were waiting. Regional safety inspector Neal Savoy said, “We know he broke some part of the Federal Aviation Act, and as soon as we decide which part it is, some type of charge will be filed. If he had a pilot’s license, we’d suspend that. But he doesn’t.” As he was led away in handcuffs, a reporter asked Larry why he had undertaken his mission. The answer was simple and poignant. “A man can’t just sit around.” Continue reading

AAII Citations

Biased_BlackIn conjunction with my speaking engagement with and for the American Association of Individual Investors (Los Angeles), I am listing here some handy resources and citations relating to my presentation. Note that many of these resources contain links themselves that offer additional, helpful research and information.

Librarius Booker, Confabulation and Choice Blindness

Jimmy Kimmel has a terrific regular feature on his show he calls Lie Witness News, whereby his crew asks people about non-existent events or people and waits for a series of often hilarious, fabricated responses.  In the recent “Miami Heat edition,” Kimmel’s crew discovered that even those who claimed to be big Heat fans and who lived in Miami knew a lot less about “their” team than they claimed.  These fans were asked what they thought of a whole litany of ridiculous things which did not exist, such as Miami’s peek-a-boo defense (in response to San Antonio’s rhombus offense), back-up point guard MooShu Pork and his being fined for criticizing the officials, Heat coach Eric Estrada, and LeBron James’ painful injury (a bruised vulva). The answers are hysterical.  My favorite is the following about alleged Heat player Libraius Booker.

“He’s gonna get to get a ring.  At the end of the day, Librarius Booker’s gonna have a ring.  A lot of people aren’t gonna have a ring at the end of the day, y’know what I’m saying? Carmelo’s not gonna have a ring.  But Librarius Booker is gonna have a ring.” 

Watch it below.

   Continue reading