Over a career that has spanned four decades so far, concertgoers have routinely paid a lot of money to hear Phil Smith play the trumpet. The long-time principal trumpet of the New York Philharmonic retired this summer after 36 years in the orchestra. In his first professional audition, while still a student, he won a place in the Chicago Symphony. While still in his 20s, Phil came to New York following just his second professional audition. According to New Yorker magazine, “For the past thirty-six years, Smith has presided over orchestral trumpet playing, with a resonant, clarion sound and a reputation for never missing a note.” He has been, inarguably, one of the world’s great performers. Continue reading
It seems to me, after a good deal of thought, reflection and research, that we have so much difficulty dealing with behavioral and cognitive bias in large measure because we build our belief structures precisely backwards. There’s nothing revelatory in that conclusion, obviously, because it is exactly what confirmation bias is all about. We like to think that we make (at least relatively) objective decisions based upon the best available evidence. But the truth is that we are ideological through-and-through and thus tend to make our “decisions” first — based upon our pre-conceived notions — and then backfill to add some supportive reasoning (which need not be very good to be seen as convincing).
I have been working on an infographic to try to illustrate the issue* and have come up with the following.
The goal should be to build from the ground up — beginning with facts, working to conclusions and so on. Beliefs are interpretations of one’s conclusions about the facts. If more fervently held, they rise to the level of conviction and perhaps to the highest pyramid level, whereby one makes a major commitment to a particular cause, approach or ideology. These commitments are the things by which we tend to be defined. Continue reading
Ezra Klein (formerly of The Washington Post) has a new venture (Vox) dedicated to what he calls “explanatory journalism” and which offers consistently progressive “explanations” for various policies by a talented but ideologically pure staff. Klein’s big introductory think piece cites research (already familiar to regular readers here) showing that people understand the world in ways that suit their preexisting beliefs and ideological commitments. Thus in controlled experiments both conservatives and liberals systematically misread the facts in a way that confirms their biases.
Interestingly, if unsurprisingly, while Klein concedes the universality of the problem in theory, all of his examples point out the biased stupidity of his political opponents. Paul Krugman – a terrific economist but an often insufferable progressive shill – sees Klein’s bid and ups the ante, exhibiting classic bias blindness: “the lived experience is that this effect is not, in fact, symmetric between liberals and conservatives.” In other words, his “lived experience” trumps the research evidence (science at work!). In Krugman’s view, conservatives are simply much stupider than liberals because reality skews liberal. He even goes so far as to deny that there are examples where liberals engage in the “overwhelming rejection of something that shouldn’t even be in dispute.” If what is being expressed is perceived to be the unvarnished truth, bias can’t be part of the equation.
Yale’s Dan Kahan, who was Klein’s primary interviewee in the referenced piece and an author of much of the relevant research, found Krugman’s view “amazingly funny,” in part because the research is so clear. Biased reasoning is in fact ideologically symmetrical. Continue reading
On June 21, 1932, after Max Schmeling lost his heavyweight boxing title to Jack Sharkey on a controversial split-decision, his manager Joe Jacobs famously intoned, “We was robbed.” It’s a conviction that hits home with every fan of a losing team and thus every sports fan a lot of the time. It’s also a point of view that has received a surprising amount of academic interest and study (note, for example, this famous 1954 paper arising out of a Dartmouth v. Princeton football game).
Traditional economic theory insists that we humans are rational actors making rational decisions amidst uncertainty in order to maximize our marginal utility. As if. We are remarkably crazy a lot of the time.
Investment Belief #3: We aren’t nearly as rational as we assume
Traditional economic theory insists that we humans are rational actors making rational decisions amidst uncertainty in order to maximize our marginal utility. Sometimes we even try to believe it. But we aren’t nearly as rational as we tend to assume. We frequently delude ourselves and are readily manipulated – a fact that the advertising industry is eager to exploit.1
Watch Mad Men‘s Don Draper (Jon Hamm) use the emotional power of words to sell a couple of Kodak executives on himself and his firm while turning what they perceive to be a technological achievement (the “wheel”) into something much richer and more compelling – the “carousel.”
Those Kodak guys will hire Draper, of course, but their decision-making will hardly be rational. Homo economicus is thus a myth. But, of course, we already knew that. Even young and inexperienced investors can recognize that after just a brief exposure to the real world markets. The “rational man” is as non-existent as the Loch Ness Monster, Bigfoot and (perhaps) moderate Republicans. Yet the idea that we’re essentially rational creatures is a very seductive myth, especially as and when we relate the concept to ourselves (few lose money preying on another’s ego). We love to think that we’re rational actors carefully examining and weighing the available evidence in order to reach the best possible conclusions.
Oh that it were so. If we aren’t really careful, we will remain deluded that we see things as they really are. The truth is that we see things the way we really are. I frequently note that investing successfully is very difficult. And so it is. But the reasons why that is so go well beyond the technical aspects of investing. Sometimes it is retaining honesty, lucidity and simplicity – seeing what is really there – that is what’s so hard. Continue reading
Nearly 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
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 twelve 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.” Continue reading
Larry 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
I spoke at an excellent conference recently and was on a panel there with two big-time economists. While I was sitting on the dias listening to my “colleagues,” I couldn’t help thinking about this old gem from Sesame Street.
And I was the “thing” that didn’t belong.
That said, I was a bit surprised that we had so many areas of substantial agreement because our starting points were pretty different. Economists look at the investment world somewhat differently from the rest of us. They come at things from a different place. Plus, neither of them was American, making our outlooks even less inherently consistent.
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.