I was introduced to behavioral finance by the classic “Gorillas in Our Midst” experiment. You have almost surely seen it. If not, have a look.
When I first saw the video, like roughly half of viewers busy counting passes, I never saw the gorilla and was dumbfounded by what I had missed. In his book, Thinking, Fast and Slow, the Nobel laureate Daniel Kahneman highlights this experiment and argues that it reveals that humans are “blind to the obvious, and that we also are blind to our blindness.” Some use this experiment, among others, to claim that we’re generally hopeless.
In that context, the arrogant moniker we have given ourselves – homo sapiens (Latin: wise man) – seems ironic at best. Traditional economic theory insists that we humans are rational actors making rational decisions amidst uncertainty in order to maximize our marginal utility. Yet the idea that we’re essentially rational creatures is a myth, and a very seductive one at that, especially as and when we relate the concept to ourselves. We tend to think that we’re almost superhuman in our ability to invoke reason to our advantage.
Despite our bluster about alleged rationality, we are biased through and through. There is an exceedingly long list of cognitive and behavioral biases to which we are prone that make it difficult for us to reason effectively. Here’s just one example from an exceedingly long list.
Ben Roethlisberger is an excellent quarterback. He was selected 11th overall in the 2004 NFL Draft by the Pittsburgh Steelers and was immediately touted as the team’s franchise quarterback. In only his second professional season, he led the Steelers to victory. Three years later he orchestrated one of the great late-game comeback victories in Super Bowl history.
In all, Big Ben has led the Steelers to 21 playoff games, three Super Bowls and two Super Bowl championships. He has been selected to six Pro Bowls.
In college, Roethlisberger was a star at Miami of Ohio, where he threw for 84 touchdowns and 10,829 yards, including a Mid-American Conference record 4,486 yards as a junior before declaring early for the NFL Draft. Roethlisberger was a great quarterback with enormous potential at Findlay High in Ohio too. As a 6’5” high school senior, he threw for over 4,000 yards and an astonishing 54 touchdowns, including eight in one game.
So why did Big Ben end up playing his college football at Miami of Ohio, a local mid-major, instead of Ohio State or some other traditional football power? Ben wasn’t a late bloomer and his coach wasn’t a dope. In fact, his coach had an excellent record and obviously understands quarterbacking – he had played the position in the SEC at Kentucky.
But here’s the thing. Roethlisberger was barely recruited before his senior year of high school because he never took a varsity snap at quarterback until that season. By that point, the big-time schools already have their QB recruits locked down.
It seems unbelievable that one of the great QBs in the world did not get on the field at that position as a varsity player until his final year of high school until you realize that the Findlay High quarterback Roethlisberger’s junior year was the coach’s senior son. Once more for emphasis: Ben Roethlisberger, Super Bowl champion and Pro Bowl quarterback, did not play QB in high school until his coach’s son graduated and vacated the position.
Roethlisberger’s coach was no doubt convinced that he was making an entirely objective evaluation and doing what was best for the team. He still thinks he made the right call. But when we possess the added information of who the starting QB was in relation to the coach, the whole situation makes perfect sense. Decisions like that are made by parents on playing fields all across America every single weekend. In that context, the otherwise apparent absurdity of playing Ben Roethlisberger at wide receiver surprises precisely none of us.
That’s the power of behavioral bias generally and confirmation bias in particular.
We are biased in ways large and small. Perhaps worst of all, while we readily see it in others, we’re blind to our own biases. Let Sheldon Cooper explain.
In light of this sort of reality, many are deeply pessimistic about whether and how humans might overcome our terrible tendencies. Kahneman has concluded that we can’t do much to help ourselves in this regard and seems to doubt our capacity to change. It isn’t hard to make that case.
The parade of horribles history has put on display is dreadful in its creativity, scope, and power. We have built death camps and filled them beyond capacity. We have made terror, war, and their threat a constant. We have fostered slavery, misogyny, and discrimination. We have trafficked other humans for profit and amusement. We have abused power, privilege, and potential. We are far too often selfish, cruel, nasty, and violent.
As the manifestly evil Noah Cross (John Huston) tells Jake Gittes (Jack Nicholson) in Chinatown, “You see, Mr. Gittes, most people never have to face the fact that at the right time and the right place, they’re capable of anything,” admitting that he raped his own daughter.
Ironically, the film was directed by Roman Polanski, himself a child rapist, multiple times over, after providing drugs and alcohol to his victims, who fled to France to avoid punishment and extradition and remains at large. It’s as if (the altogether disgusting) Woody Allen were doing Kahneman’s marketing: “I wish I had some kind of affirmative message to leave you with. I don’t. Would you take two negative messages?”
On many days, all too much of the time, we’re delusional, lazy, short-sighted, partisan, arrogant, easily distracted confabulators. Whether we’re looking in the mirror or into our souls, we usually see only the best version of ourselves. In effect, we often hold up a picture of who we like to think we are or can be, point to it, and pretend it’s what we look like.
It’s not wrong to say, “Everybody’s stupid, that’s for sure.”
As the Nobel laureate Eugene Fama has explained, “That’s the thing about behavioral economics. What their studies seem to show is that people don’t learn from experience. If you’re stupid, you’re repeatedly stupid. You won’t learn. Most people are stupid. That’s the proposition.” But that isn’t us all the time. All day, every day, we are observers of the world around us. We interpret what we perceive and make decisions based upon those interpretations. It is axiomatic that the more accurate our observations and the better our interpretations of them – the closer they comport with objective reality – the better our decisions will be.
Fundamentally, we aren’t nearly as stupid and ridiculous as often portrayed within behavioral finance. We are no homo economicus, but we aren’t imbeciles, either, as the astonishing discoveries and innovations of science demonstrate, to pick just one big and obvious example.
As Bob Grant wrote in The Scientist just this week: “The scientific method, as a mode of observation piloted by humans for generations, has probed outer space, the depths of the oceans, and the inner reaches of cells, molecules, and atoms—our amazing brains at the helm. Never satisfied, the three-pound, skull-encased lump of flesh strains to know more, discover more, solve more. And the universe obliges. Unimaginably vast swaths of space lie unexplored; most of the ocean floor remains a mystery; and new insights into the functioning of cells and the nature of subatomic matter emerge on an almost daily basis.”
Nowadays are the best days to be human, and the progress we have seen in getting there – in medicine, technology, and industry, to name just a few of the many – would have been impossible without some ability to overcome, or at least manage, our biased tendencies. Thus, we are heroes and villains, geniuses and dullards, saints and sinners, typical and extraordinary, right and wrong, sometimes all at once, sometimes selectively, and sometimes unknowingly. That often difficult human reality is central to who, what, why, and how we are.
Truth be told, we have made progress, and often enormous progress, on virtually every human problem except for the most fundamental one. Human nature – a complex amalgam of the base and the heroic, the compassionate and the brutal, the brilliant and the imbecilic – remains largely static across human history. “The worst in our nature coexists with the best, and so it will ever be,” wrote sociobiologist E.O. Wilson. As Leibniz said, quoting a line from his favorite comic opera, “Everywhere and always, it’s the same as it is here.”
The scientific method is the best available mechanism for ascertaining what is real and true, for mitigating the inherent biases of human nature. Despite its limitations and shortcomings, it provides a solid demonstration that we may do irrational things sometimes, even oft times, but we aren’t irrational through-and-through.Indeed, as the Nobel laureate Joseph Stiglitz has argued, worldwide standards of living began to improve in the late 18th century and have continued to improve ever since for two primary reasons: the development of science and developments in social organization, most prominently the growth of market economies and the rule of law. Significantly, science and the rule of law both include carefully derived and articulated systems and methods of assessing and verifying reality and what it means.
Nowadays are the best days to be human, and the progress we have made to get there would have been impossible without some ability to overcome, or at least manage, who and what we are.
On our best days, when wearing the right sort of spectacles, squinting and tilting our heads just so, we can be observant, efficient, loyal, focused, assertive truth-tellers.
Behavioral economics is endlessly fascinating, but largely devoid of ways to mitigate the problems so engagingly put on display. As Kahneman said, when asked about his hope for human improvement, individually and collectively, in light of our biases and cognitive illusions: “I’m not an optimist in general and I’m certainly not an optimist about those questions….You don’t get there.” But science does get us there, or at least partway there, demonstrating the possibilities every single day. Every. Single. Day.
F. Scott Fitzgerald glibly (yet famously) proclaimed that “the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” He might be righter than he knew, righter than he could have known. We are a shoddy species, yet we still can accomplish much, supported by what Lincoln called “the better angels of our nature.” Fundamentally, we aren’t nearly as stupid and ridiculous as often portrayed within behavioral finance. We are no homo economicus, but we aren’t idiots, either.
Nowadays are the best days to be human, and I find great hope in that.