A Behavioral Finance Playlist

It isn’t “Weird Science” (Oingo Boingo)…

…or “Brain Damage” (Pink Floyd)…

…or even “Insane in the Brain” (Cypress Hill).

It’s utterly human (and I write about it often). We are all deeply flawed. We have inherent flaws and weaknesses that impede good judgment and good behavior. Behavioral finance has done a pretty good job outlining these foibles and music does a great job demonstrating them. So let’s get started with our Behavioral Finance Playlist. 

Let’s Get It Started (Black Eyed Peas)

We like to think that we carefully gather and evaluate facts and data before coming to a conclusion. That we make the best possible decisions based upon the best available evidence.

Did you ever have to make up your mind? (Lovin’ Spoonful)

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. As University of Virginia psychologist Jonathan Haidt explains, “We can spot a supporting justification at 200 meters hiding in a tree. But if it’s dangling in front of our face and it goes against our position, we can’t see it.”

Of course, the music is simply Zed Zeppelin’s Stairway to Heaven. But if you play if backwards, you can absolutely be made to hear “My Sweet Satan” and more (video explanation here).

When a conclusion fits with our desired narrative, so much the better (we think), because narratives are crucial to how we make sense of reality. We inherently prefer narrative to data — often to the detriment of our understanding. Stories are, quite literally, belief-makers.

Land of Make Believe (The Chuck Mangione Quartet)

We are consistently overconfident creatures. The subjective confidence we place in our judgments is reliably greater than their objective accuracy. Indeed, we live in an overconfident, Lake Wobegon world (“where all the women are strong, all the men are good-looking, and all the children are above average”). Thus we are only correct about 80 percent of the time when we are “99 percent sure” while fully 94 percent of college professors believe they have above-average teaching skills (anyone who has gone to college will surely disagree with that). In an example that’s a little closer to home, venture capitalists are wildly overconfident in their estimations of how likely their potential ventures are either to succeed or fail. Who then is better to illustrate overconfidence bias than M.C. Hammer?

U Can’t Touch This

Unless maybe Journey?

Don’t Stop Believin’

Or maybe DJ Khaled?

All I Do is Win

The spotlight effect is the common phenomenon in which people tend to believe they are noticed more than they really are, although in Tupac’s case it may have been true.

All Eyez On Me (Warning: VERY explicit lyrics)

Our self-serving bias is related to confirmation bias and optimism bias. Self-serving bias pushes us to see the world such that the good stuff that happens is my while the bad stuff is always someone else’s fault. Here’s Bob Dylan with Positively 4th Street, which is about the jealousy Dylan encountered in Greenwich Village (he lived on 4th Street in New York) and along fraternity row at the University of Minnesota (located on 4th Street in Minneapolis). Dylan’s success surely involved some luck, but he earned it too.

We intuitively think that the more choices we have the better off we are. However, the sad truth is that too many choices can lead to decision paralysis due to information overload. For example, participation in 401(k) plans among employees decreases as the number of investable funds offered increases. We are readily paralyzed by too many choices. Here’s the Clash.

Should I Stay or Should I Go?

We all run in herds — large or small, bullish or bearish, passive or active. Institutions herd even more than individuals in that investments chosen by one institution predict the investment choices of other institutions by a remarkable degree. Even hedge funds seem to buy and sell the same stocks, at the same time, and track each other’s investment strategies. That affinity fraud (e.g., Bernie Madoff fleeced the Jewish community to which he belonged) is so common is definitive evidence of herding. And teenagers are perhaps the biggest herders of all, as Avril Lavigne explains.

“But you’ve become

Somebody else ’round everyone else”

We’re all too ready to obey perceived authority no matter the consequences, as the Milgram experiment horribly demonstrated.

We Do What We’re Told (Peter Gabriel)

Social proof is a phenomenon whereby we assume the actions of others in an attempt to reflect correct behavior for a given situation, as shown by Asch conformity experiment. Think Mass Appeal (Gang Starr).

“Money’s growing like grass with the mass appeal”

We also aren’t nearly as smart and skilled as we readily assume. We are routinely burdened by the “hubris hypothesis” (for example, as an important study found, physicians “who were ‘completely certain’ of the diagnosis ante-mortem were wrong 40 percent of the time”). Eminem evidences this superiority complex as well as anyone in Cleanin’ Out My Closet.

“Keep kicking ass in the morning and taking names in the evening

Leave ’em with a taste as sour as vinegar in they mouth

See they can trigger me, but they’ll never figure me out

Look at me now, I bet ya probably sick of me now ain’t you momma?

I’ma make you look so ridiculous now”

We then extend our seeming superiority more broadly to include those with whom we identify. We thus tend to form what Jonathan Haidt calls “tribal moral communities” that become self-enforcing, as Buffalo Springfield explains in For What It’s Worth.

“What a field-day for the heat

A thousand people in the street

Singing songs and carrying signs

Mostly say, hooray for our side”

Hindsight bias is our inclination, after the fact, to see an event as having been predictable, even if there was little objective basis to have predicted it. That’s how Taylor Swift can be so sure.

I Knew You Were Trouble

We are highly loss averse. Empirical estimates find that losses are felt between two and two-and-a-half times as strongly as gains. Thus the disutility of losing $100 is at least twice the utility of gaining $100. Loss aversion favors inaction over action and the status quo over any alternatives. Here’s Lily Allen (The Fear).

“I don’t know what’s right and what’s real anymore

And I don’t know how I’m meant to feel anymore

And when do you think it will all become clear?

‘Cause I’m being taken over by the fear”

It’s very hard for us to manage that fear.

Crossroad (Bone Thugs-n-Harmony)

As demonstrated most famously by the “marshmallow experiment,” if we are able to delay gratification we will be far more successful later. But doing so consistently is really hard. Not surprisingly, we aren’t very good at this hyperbolic discounting. Let Rufus Wainwright explain (Instant Pleasure).

“I don’t want somebody to love me

Just give me sex whenever I want it

‘Cause all I ask for is instant pleasure

Instant pleasure, instant pleasure”

It’s really hard for us to focus on making a better future and then maintaining that focus.

Don’t Stop (Thinking About Tomorrow (Fleetwood Mac)

The availability heuristic is a mental shortcut that relies on immediate examples that come to a given person’s mind when evaluating a specific topic, concept, method or decision. Here’s Reba.

“And he wonders why he searched so long

When she was always there at that diner waiting on”

Nobel laureate Daniel Kahneman’s great memoir of his life’s work, Thinking Fast and Slowoutlines what he calls the “planning fallacy.” Most of us overrate our own capacities and exaggerate our abilities to shape the future. The planning fallacy is our tendency to underestimate the time, costs, and risks of future actions and at the same time overestimate the benefits thereof. It’s at least partly why we underestimate bad results It’s why we think it won’t take us as long to accomplish something as it does. It’s why projects tend to cost more than we expect. It’s why the results we achieve aren’t as good as we expect. It why things don’t work out as often as we’d like.

We Can Work It Out (The Beatles)

Kahneman begins Thinking Fast and Slow as follows. “The premise of this book is that it is easier to recognize other people’s mistakes than your own.” Or, in the careful prose of scientific research, “people who were aware of their own biases were not better able to overcome them.” Kahneman admits as much even for himself. “My intuitive thinking is just as prone to overconfidence, extreme predictions, and the planning fallacy as it was before I made a study of these issues.” As I note repeatedly, we might grudgingly concede that we hold views that are wrong. The problem is in providing current examples. Even worse still is the unfortunate and shocking reality that the smarter and more self-aware we are the more vulnerable we are to these sorts of errors. Warren Buffett put it really well. “What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.” Bias blindness impedes us all.

“Oh Lord, it’s hard to be humble when you’re perfect in every way” (Mac Davis)

Like P Diddy (with Notorious B.I.G. and Busta Rymes in Victory), we like to think that we won’t be swayed by our emotions.

“Put your money on the table and get your math on.”

We like to think that we will go our own way, but we all too rarely do.

Go Your Own Way (Fleetwood Mac)

We are deluded into thinking that we see things the way they really are.

On a Clear Day (Barbra Streisand)

And, as Debby Boone explains, “It can’t be wrong when it feels so right”

You Light Up My Life

But the sad truth is, we much more typically see things the way we really are.

Here’s a recap of some of the key points of behavioral finance from teacher Brad Wray.

Do you have any other songs to add to my list?

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