It was a situation every kid who plays baseball has dreamed about. With his team trailing last night, 4-3, with two outs in the ninth inning, Adam Rosales of the Oakland A’s launched what appeared to be a game-tying home run off Cleveland Indians closer Chris Perez that bounced off the railing just beyond the high left field wall. Tie game. Glory time.
Not so fast.
It’s a consuming question for all Americans: Should the FBI, the CIA, Homeland Security and related entities have “connected the dots” about the Tsarnaev brothers and thus been able to prevent the Boston Marathon bombings? Continue reading
There is a wide body of research on what has come to be known as “motivated reasoning” and – more recognizably for those of us in the investment world – its “flip-side,” confirmation bias. While confirmation bias is our tendency to notice and accept that which fits within our preconceived notions and beliefs, motivated reasoning is the complementary tendency to scrutinize ideas more critically when we disagree with them than when we agree. We are also much more likely to recall supporting rather than opposing evidence. The Simmelweis Reflex is a reflection of this phenomenon. Upton Sinclair offered perhaps its most popular expression: “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
Source: Clay Bennett
Tomorrow evening Duke and North Carolina will renew the best rivalry in sports via a basketball game on the Duke campus (ESPN, 9pm ET). As a freshman, Jay Bilas (now of ESPN) lined up for a foul shot in his first rivalry game next to then All-American and future NBA All-Star Brad Daugherty (and also a current ESPN-er), who looked over at him and said “I’m going to beat you like a rented mule.” That comment was astonishingly mild as these things go.
I first sat in Cameron Indoor Stadium as a student in 1978 and didn’t miss a home basketball game while I was enrolled at Duke. Every game was special – and wild. NBC came to Cameron to do the first national telecast from the arena on January 28, 1979 for a game against Marquette (I was there, of course) and insisted on a time-delay so the crowd could be censored if necessary. But Duke v. Carolina was and is something else entirely. Continue reading
We all like to think that we carefully gather and evaluate facts and data before coming to our conclusions. But we don’t. As I have pointed out previously, we want to think that we’re like judges, impartially and painstakingly examining the evidence before making the best, most rational determination possible. But we aren’t. We’re much more like attorneys looking for any scrap of evidence or argument that we might use to help to support our preconceived notions, truth be damned.
Indeed, we all tend to suffer from confirmation bias and thus reach our conclusions first. Only thereafter do we gather facts, but even so it’s only to support our prior commitments. We then take our selected “facts” and cram them into our desired narratives, because narratives are crucial to how we make sense of reality. They help us to explain, understand and interpret the world around us. They also give us a frame of reference we can use to remember the concepts we take them to represent. Perhaps most significantly, we inherently prefer narrative to data — often to the detriment of our understanding. Keeping one’s analysis and interpretation of the facts reasonably objective – since analysis and interpretation are required for data to be actionable – is really, really hard even in the best of circumstances (the crucial point of Daniel Kahneman’s outstanding Thinking Fast and Slow).
I offer this introduction because college basketball season is upon us again and it provides a helpful predicate to a perfectly obvious conclusion: fans (including your humble author) are inherently irrational. If we are exceedingly prone to various mental biases in life generally, when we’re in fan mode we can readily go off the rails entirely. And when we’re in fan/rivalry mode, almost anything is possible.
I watched last week’s Duke v. Kentucky game in a bar in Minnesota (where I was on business). I cheered, cried, cursed the evil John Calipari and his minions, and hated on the referees. It took every bit of effort I could muster to avoid being a total jerk, especially when it became clear that UK was going down.
I’m not sure I succeeded.
Even so, no matter how much I love sticking it to Kentucky, it’s nothing like what a Duke v. Carolina game does to me. With more than three decades of perspective from my school days, I can now see what a great coach and a great man legendary UNC-CH Coach Dean Smith was. The objective facts demand as much. He won a then-record number of games and did it “the right way.” More importantly, he was instrumental in the fight for racial justice and equality even at a time when he didn’t have all that much clout.
But to me as a student in Cameron Indoor Stadium on game day wearing the correct hue of blue, he was an arrogant blow-hard who sanctimoniously talked down to opponents, intimidated officials and got all the calls. Of course, now that Coach K has passed him on the all-time wins list, I’m a bit more willing to be gracious. Even so, I’m still perfectly willing to argue that Dean — while terrific at recruiting and preparation — was overrated as a game coach.
So there.
It shouldn’t have been surprising, then, that when Duke’s Mike Krzyzewski and Pat Summitt were named Sports Illustrated magazine’s Sportsman and Sportswoman of the year, that announcement was met with more than a bit of skepticism and consternation by many UNC-CH fans. After the news broke, I couldn’t help but take a peek at Inside Carolina‘s message boards for a bit of fan reaction, since internet message boards tend to take typical fan insanity and ratchet up the level of loony more than a few notches: confirmation bias illustrated.
I was not disappointed.
Some representative comments follow.
Here’s my favorite:
I guess it makes sense, if the definition of sportsman is ‘a d-bag who denigrates referees’. K is like the WWF (the environmental group): both make more money than they deserve, both are rotten to the core, but somehow both are believed to be saints.
Of course, a silly Duke fan had to make a trollish appearance in the thread to tweak the faithful. He noted that “I love any and everything that may ruffle the feathers of the Carowhina cheese and wine fans. Especially anything that pertains to Duke.” That bit of delightful wit (Noel Coward’s legacy is not in danger) got him summarily banned from the site.
As fans, the more reasoned among us often try to “put some lipstick on the pig” and gussy-up our insanity with perfectly rational-sounding reasons why we are better than them, even though we have long-since decided that it is so, facts notwithstanding. Indeed, some might argue that one of my favorite websites, the Duke Basketball Report, exists for precisely this reason (and I love it nonetheless). It’s the bias blind-spot on full display.
As a Duke alum and fan, I’m resigned to the reality that lots of people (and especially those wearing the wrong shade of blue) are going to think that Coach K is evil, that Duke gets all the calls and that the Cameron Crazies are a bunch of over-privileged poseurs no matter what a truly objective analysis of the facts might show. It’s both human and all but inevitable.
I’ll even go so far as to say that it’s perfectly okay to be utterly irrational about your favorite team. We’re fans — as in fanatics — after all.
This is all well and good — true even. But what do silly fans and our obsessions have to do with investing? A lot, as it turns out. You see, we’re not just talking about a fan thing. It’s a human thing.
As investors — as people — we are prone to the same types of foibles, obsessions and foolishness as lunatic sports fans (isn’t that phrase redundant?). As noted off the top, we reach our conclusions first and then run around trying to support them. We talk our books the way fans talk up their teams. We’re wildly overconfident about our books and ourselves.
Worst of all, even when we recognize our inherent weaknesses, we think they only apply to others. With respect to the things we focus a lot of time and attention on — like our work — we tend to see “our side” as not just true, but obviously true. It’s a by-product of the bias blind spot. Therefore, our strongly held positions aren’t really debatable — they’re objectively and obviously true. After all, if we didn’t think our positions were true, we wouldn’t hold them. And (our thinking goes) since they are objectively true, anyone who makes the effort to try should be able to ascertain that truth. Our opponents are thus utterly without excuse.
We’re fans of our books, of our investment approaches, philosophies, and of our styles no less than Carolina’s nonsensical and inherently crazy supporters are fans of their team. Try desperately to bear it in mind (and deal with the reality accordingly) — as fans and as investors, we’re just as nuts as they are. Terrifying, isn’t it?
Despite the seemingly constant claims of the political rhetoric, I don’t expect the economy to improve dramatically after the election no matter which presidential candidate wins. The inherent problems are real and the risks are high. Moreover, presidents have far less control over the economy than is commonly assumed. There are no silver bullet solutions available.
If we are to expect real political progress on economic issues going forward, the current political dysfunction needs to be altered. I propose three starting points for fixing things.
1. Assume good faith unless and until the lack of it is clearly demonstrated. We live in a politically polarized time. The divisiveness is both pervasive and corrosive. Partisans are convinced that their positions aren’t really debatable. Indeed, they think (assume even) that their opinions are objectively and obviously true. After all, if we didn’t think our positions were true, we wouldn’t hold them. As Jeffrey Friedman has reminded me, Walter Lippmann made this case almost a century ago:
Where two factions see vividly each its own aspect, and contrive their own explanations of what they see, it is almost impossible for them to credit each other with honesty. If the pattern fits their experience at a crucial point, they no longer look upon it as an interpretation. They look upon it as ‘reality.’
In other words, we think our opponents are suppressing or denying the obvious truth.
Because the base-case assumption — steeped in bias blindness — is that those on the “other side” are not generally acting in good faith, the necessary conclusion is that they must be stupid, delusional or dishonest (for example, see here, here and here – and note the comments). I don’t mean to suggest that politics is not fraught with deception and fraud. But these should not be our default assumptions. We should never underestimate the power of confirmation bias or bias blindness.
We increasingly couch political and policy arguments in moral terms. As cognitive psychologist Robert Siegler has argued, we now tend to see elections as more crusade than choice. But if we are to have any hope of seeing leaders with different viewpoints working together to solve problems, it ought to start with the idea that those who disagree are generally people of goodwill acting in good faith for what they see as the good of the country. In other words, they may be wrong, but they aren’t necessarily (or even likely to be) stupid, delusional or evil. Recognition of the reality and the power of our behavioral biases would provide a good start toward making some progress toward a political process that actually works.
2. Commit to the idea that data trumps ideology. We all like to think that we act like impartial judges, making decisions only after a careful weighing of all the evidence. But that is rarely what happens, as the behavioral research establishes beyond doubt. We are much more like lawyers, scavenging for whatever arguments we can find that might help, irrespective of relevance or accuracy.
Our overriding tendency is to concoct belief systems based upon incomplete evidence or even out of whole cloth and then to set out looking for evidence to confirm what we have already decided. Moreover, we are not anything like objective. We interpret the evidence we do examine in ways that tend to support our prior commitments. We are ideologues through and through.
Per Friedman, when properly conceived, political and policy questions most often resolve into questions of fact or factual interpretation. That is not to say that politics does not involve clashes of values. But they are far less frequent than we assume. And factual claims are much more conducive to discourse, debate and compromise than moral assertions.
Because we are such ideologues, it can be exceedingly difficult for us to come to the realization generally and (especially) in specific cases that careful factual analysis can answer most questions. But if we are to succeed as individuals and as a nation, especially with respect to difficult and contentious issues, we must commit to a data-driven process that requires that our political actions and decisions be based upon what can be demonstrated factually rather than upon our ideological presumptions (of whatever stripe).
3. Demand that partisans explain why they hold their views and why we should expect them to work. As Steven Sloman, a professor of cognitive, linguistic and psychological sciences at Brown University recently pointed out in The New York Times, the “illusion of explanatory depth” (an idea developed by the Yale psychologist Frank Keil and his students) means that we typically believe that we understand how complex systems work even (perhaps especially) when we don’t. It is not until we are asked to explain how such a system works that we come to realize how little we actually know.
Significantly, it is not good enough merely to ask people to justify their positions. Indeed, discussion and argument generally harden positions and make people less likely to alter their views. To have an impact on their understanding and thus their behavior, we must ask them to explain the mechanisms by which a policy could and would work. When we do, those with limited understanding tend to moderate their views. In other words, by demanding a data-driven explanatory process, we increase the likelihood of compromise and perhaps even consensus. As the expression goes, we’re all entitled to our own opinions, but not to our own facts.
I hasten to add that these three approaches won’t help much if the political factions and the political actors that represent them continue to refuse to engage in substantive dialogue, to resist even the idea of compromise and to see recalcitrance as being in their best political interest. Even so, no matter how naïve I may be for saying so, these three ideas would offer – like the old joke about 100 dead lawyers at the bottom of the ocean – a really good start.
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This post is a follow-up to last week’s Bias Blindness and Political Polarization.
As I have argued many times (here, for example), we like to think that we carefully gather and evaluate facts and data before coming to a conclusion. But we don’t. Instead, we tend to suffer from confirmation bias and thus reach a conclusion first. Only thereafter do we gather facts and see those facts in such a way as to support our pre-conceived conclusions. When a conclusion fits with our desired narrative, so much the better, because narratives are crucial to how we make sense of reality. In other words, we want to think we’re like judges searching for truth impartially when, in fact, we’re much more like attorneys running around hunting for any argument that we think might help.
With that preface, consider my friend Ben Malcolmson. He’s a terrific guy and very good buddies with both of my sons. He also has a great story. Ben posted this on his Facebook page yesterday:
And on Twitter: “It’s sad that ESPN and Packer fans have sucked all the fun out of a win that should’ve been one for us to cherish and enjoy.”
At first glance, this looks nuts, right? Nobody really thinks the right call was made, do they? But when we consider that Ben is close to Pete Carroll and works for the Seahawks, we all nod our heads and intuitively get it — it’s confirmation bias writ large.
Unfortunately, we’re all as susceptible to it as Ben is. Moreover, due to our overarching problem (the bias blind spot), we tend to think the problem applies only to others. As if….
The photograph above, taken by German photographer Thomas Hoepker, is one of the iconic images of 9.11. The picture was taken at the Brooklyn waterfront on the afternoon of that infamous day eleven years ago. In Hoepker’s words, he saw “an almost idyllic scene near a restaurant — flowers, cypress trees, a group of young people sitting in the bright sunshine of this splendid late summer day while the dark, thick plume of smoke was rising in the background.” By his reckoning, even though he had paused but for a moment and didn’t speak to anyone in the picture, Hoepker was concerned that the people in the photo “were not stirred” by the events at the World Trade Center — they “didn’t seem to care.” Even though he published many images from that day, Hoepker withheld this picture for over four years because, in his view, it ”did not reflect at all what had transpired on that day.”
In 2006, the image was published in David Friend’s book, Watching the World Change. Comments from Hoepker were included. Frank Rich then wrote a 9.11 fifth anniversary column in The New York Times about the photo, calling it “shocking.” Rich suggested that the five New Yorkers were “relaxing” and were already “mov[ing] on” from the attacks. Rich described those in the photo as being on ”what seems to be a lunch or bike-riding break, enjoying the radiant late-summer sun and chatting away as cascades of smoke engulf Lower Manhattan in the background.”
Here is more of the explanatory narrative Rich created:
Mr. Hoepker’s photo is prescient as well as important — a snapshot of history soon to come. What he caught was this: Traumatic as the attack on America was, 9/11 would recede quickly for many. This is a country that likes to move on, and fast. The young people in Mr. Hoepker’s photo aren’t necessarily callous. They’re just American.
Others reacted similarly. It was a plausible interpretation based upon the information available (the picture). More importantly, it framed Rich’s desired narrative perfectly.
Daniel Plotz quickly came forward with an alternative interpretation that disputed Rich, calling Rich’s reading of the image a “cheap shot.” In Plotz’s view the five had not ignored or moved beyond 9.11 but had “turned toward each other for solace and for debate.” To his credit, Plotz emphasized that he didn’t “really know” what the pictured people were doing and feeling and called upon them to contact him so as to set the record straight. Two did, and they repudiated Rich’s narrative in the strongest of terms.
The first to respond was Walter Sipser, a Brooklyn artist and the man on the far right in the shot. “A snapshot can make mourners attending a funeral look like they’re having a party,” he wrote. “Had Hoepker walked fifty feet over to introduce himself he would have discovered a bunch of New Yorkers in the middle of an animated discussion about what had just happened.” Chris Schiavo, a professional photographer, Sipser’s then-girlfriend and second from the right above, also responded. She criticized both Rich and Hoepker for their “cynical expression of an assumed reality.” As a “third-generation native New Yorker, who knows and loves every square inch of this city,” whose “mother even worked for Minoru Yamasaki, the World Trade Center architect,” she stated that “it was genetically impossible for [her] to be unaffected by this event.”
So much for Rich’s narrative explanation.
We like to think that we carefully gather and evaluate facts and data before coming to a conclusion. Instead, we tend to suffer from confirmation bias and thus reach a conclusion first. Only thereafter do we gather facts and see those facts in such a way as to support our pre-conceived conclusion. When it fits with our desired narrative, so much the better, because narratives are crucial to how we make sense of reality. They help us to explain, understand and interpret the world around us. They also give us a frame of reference we can use to remember the concepts we take them to represent. Perhaps most significantly, we inherently prefer narrative to data — often to the detriment of our understanding. Keeping one’s analysis and interpretation of the data reasonably objective – since analysis and interpretation are required for data to be actionable – is really, really hard even in the best of circumstances.
An interesting piece by John Allen Paulos for The New York Times sheds additional light on the stories versus statistics dialectic. “There is a tension between stories and statistics, and one under-appreciated contrast between them is simply the mindset with which we approach them. In listening to stories we tend to suspend disbelief in order to be entertained, whereas in evaluating statistics we generally have an opposite inclination to suspend belief in order not to be beguiled.”
As this tale of the unfortunate Mr. Rich demonstrates, we are all too prone to confirmation bias and to its corollary, what Nassim Taleb calls the “narrative fallacy” (looking backward and creating a pattern to fit events and constructing a story that explains what happened along with what caused it to happen). This story has some very serious and practical implications related to life in general and to investing in particular.
1. Be skeptical about the data you collect, the patterns you detect, your interpretations thereof and the conclusions you draw.
2. Keep looking for more data — especially data that questions or contradicts your assumptions, hypotheses and conclusions.
3. Be especially skeptical of the story you think the data tells.
4. Rinse and repeat #1, #2 and #3 as appropriate (pretty much all the time).
We are wildly overconfident about our abilities generally. The more we repeat and reiterate one of our explanatory narratives, the harder it is to recognize evidence that ought to cause us to re-evaluate our previous conclusions. By making it a careful habit skeptically to re-think our prior interpretations and conclusions, we at least give ourselves a fighting chance to correct the mistakes that we will inevitably make.
As with everything in science, every conclusion we draw must be tentative and subject to revision as the facts demand. As John Maynard Keynes famously stated, “When the facts change, I change my mind. What do you do, sir?” Indeed, what do you do?
Note: This post is a reprint. It first appeared here.
Four rabbis had a series of theological arguments, and three were always in accord against the fourth. One day, the odd rabbi out, after the usual 3 to 1, majority rules statement that signified that he had lost again, decided to appeal to a higher authority. “Oh, G-d!” he cried. “I know in my heart that I am right and they are wrong! Please give me a sign to prove it to them!”
It was a beautiful, sunny day. As soon as the rabbi finished his prayer, a storm cloud moved across the sky above the four. It rumbled once and dissolved. “A sign from G-d! See, I’m right, I knew it!” But the other three disagreed, pointing out that storm clouds form on hot days.
So the rabbi prayed again: “Oh, G-d, I need a bigger sign to show that I am right and they are wrong. So please, G-d, a bigger sign!” This time four storm clouds appeared, rushed toward each other to form one big cloud, and a bolt of lightning slammed into a tree on a nearby hill.”I told you I was right!” cried the rabbi, but his friends insisted that nothing had happened that could not be explained by natural causes.
The rabbi is getting ready to ask for a very big sign, but just as he says “Oh G-d…” the sky turns pitch black, the earth shakes, and a deep, booming voice intones, “HEEEEEEEE’S RIIIIIIIGHT!”
The rabbi puts his hands on his hips, turns to the other three, and says, “Well?”
“So,” shrugged one of the other rabbis, “now it’s 3 to 2!”
Perspectives on capital markets and personal finance
Perspectives on capital markets and personal finance
Perspectives on capital markets and personal finance
Perspectives on capital markets and personal finance
a forum for news, ideas and commentary on the art and science of long-term investing
Perspectives on capital markets and personal finance
Perspectives on capital markets and personal finance
"In individuals, insanity is rare; but in groups, parties, nations and epochs it is the rule" - Nietzsche
Perspectives on capital markets and personal finance
Perspectives on capital markets and personal finance
Perspectives on capital markets and personal finance
Perspectives on capital markets and personal finance
Perspectives on capital markets and personal finance
Perspectives on capital markets and personal finance
