Confirmation Bias Illustrated

Please watch the video here (it can’t be embedded) and thank me later.

“Like, I’m listening to what you’re saying but I only hear what I want to.”

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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. 

Chris Rock Explains Bias Blindness

When the nominations for the 88^th annual Academy Awards were announced this past January and for the second year in a row included no minority nominees for any of the major performance categories, my first thought was here we go again. But my second thought was that Chris Rock would be hosting the Oscars’ award ceremony and that there might be fireworks.

I was not disappointed. Rock quickly let it be known that he would not be boycotting the ceremony (as he quipped during his Oscar monologue, “How come there’s only unemployed people that tell you to quit something?”) but also that his opening monologue would be addressing the #OscarsSoWhite controversy in a big way.

He sure did.

The Jewelry Effect

I’m not a fisherman, but I was fascinated recently to come across an article about the science behind the creation and use of fishing lures. Size, shape, color and even taste all matter. Interestingly, however, there is a surprising degree to which the effectiveness of the lure doesn’t matter commercially. For example, there is a dizzying array of bass lures in variations of blues and purples (see at left, for example) even though bass cannot see those colors as anything other than gray. But people buying lures seem to like those colors. Those involved in the research and sale of fishing lures refer to this phenomenon as the “jewelry effect.”

“We design lures for the fish, but fish don’t buy lures,” says Keith A. Jones, a director of research for an Iowa lure-maker. “It’s hard to convince anglers that a lure’s color doesn’t make much difference.” Scientific reality doesn’t even get much respect in the fishing world.

Jones recognizes that, to be commercially successful, lures need to be aesthetically pleasing to the people who buy them. Accordingly, some lures that work well need a design change to sell. Ted Dzialo, executive director of the National Fresh Water Fishing Hall of Fame and Museum in Hayward, Wisconsin, simply captures the essence of the issue. “I think most lures are designed to catch more fishermen than fish.”

If this sounds remarkably similar to the money management business to you, you’re not alone. So-called “smart beta” is really good marketing because it takes advantage of demand for beta-driven solutions but it is no panacea. Moreover, “factor investing” can trace its origins back to at least Benjamin Graham and is hardly new to smart investors. After the financial crisis, consumers rushed to money managers offering tactical management in order to try to avoid the next big downturn even though there is precious little evidence that it works. And hedge funds continue to lure major assets and major investors – perhaps because those investors want to prove to themselves and others that they’re rich – even though hedge fund performance has been, in two words, truly dreadful.

There are plenty of other examples, of course, but you get the idea. Good investing is necessarily a long-term enterprise and we humans struggle badly with the long-term. The short-term is too alluring. Our efforts at hyperbolic discounting generally suck. Thus we are always prone to eat the cake and skip our work-outs.

Those who market money management are well aware of these tendencies. And, to be fair, there isn’t much that’s sexy about good money management. We want the next Apple rather than diversification. We want to avoid the next big crash but every last drop of upside. We want to get rich quick and think we’re smart enough to find that next big thing. But we are routinely disappointed and, when we think we’ve (finally!) found the Holy Grail, it turns out that Holy Grail Investment Management is run by Bernie Madoff.

Most money management firms set out first and foremost to lure and catch investment dollars and only secondarily to manage the assets won effectively. The jewelry effect is at least as prevalent in money management as in fishing. But pretty it’s not.

Bear Territory

After every football victory, the California Golden Bears declare that the ground on which they stand is Bear Territory. “You know it! What? You tell the story! What? You tell the whole damn world this is Bear Territory!” Watch this particularly lively rendition after a win in The Big Game over Stanford (starting about 1:20 in; my youngest is at the top of the screen and was number 46 for Cal).

Lots of experts and alleged experts in recent days have been declaring that we’re in a different sort of “bear territory” as the market has gotten off to perhaps its worst start to a year ever.

Trumping Truth with Stories

One of the few consistencies of a wild 2016 presidential campaign thus far is that Republican frontrunner Donald Trump is willing to spin, obfuscate, exaggerate, misdirect, deflect, lie outright and double-down when called out for having done so. And, so far at least, it’s working. Truth – literal factual accuracy – just doesn’t seem to matter to him or to his supporters (who recently shouted “Sieg Heil” and “Light him on fire” at a black protestor in Las Vegas). If it feels right to them and fits into their favored narratives, from their perspective it is deemed true. What actually happened could not be less relevant.

This post-truth worldview isn’t a new-found tactic now that the Donald has entered the political world. For him, it has been a consistent way of life designed to benefit the Trump “brand.” He has thus routinely inflated his supposed net worth, often by billions of dollars, to make himself appear far more financially successful than he actually is. And he keeps claiming that his campaign is self-funded (because he’s really rich, donchaknow) when it demonstrably isn’t. But his Pinocchio-like behavior hasn’t been limited to things that, if believed, offer an obvious benefit to the Donald.

It Can’t Be Wrong When It Feels So Right

“What ails the truth is that it is mainly uncomfortable, and often dull. The human mind seeks something more amusing, and more caressing.”

H. L. Mencken

Debby Boone released “You Light Up My Life” in 1977 and it became a #1 hit, the most successful single of the 1970s and won her a Grammy. Hard to believe, isn’t it? Anyway, at the song’s climax, she proclaims her love for the unnamed object of her desire and earnestly intones that “it can’t be wrong when it feels so right.”

Any parent of teenagers recognizes how dangerous such a claim can be and anyone who ever was a teenager and has the slightest bit of self-awareness can recognize that the claim is utterly false. Lots of things feel really, really right at the time but are really, really wrong. Yet no matter how ludicrous the claim obviously is and how clearly we see its falsity in moments of sanity, we follow its dictates time and again. As John Junor famously expressed it, “an ounce of emotion is equal to a ton of facts.”

On our better days, when wearing the right sort of spectacles and by tilting our heads just so, we can be observant, efficient, loyal, assertive truth-tellers. However, on most days, much of the time, we’re delusional, lazy, partisan, arrogant confabulators. The problem is what Stephen Colbert (who began his new late-night television venture this week) described as “truthiness” on his first episode of The Colbert Report a decade ago (watch it here). It’s the quality of seeming or being felt to be true, even if it’s not necessarily true or perhaps false.

Math is Different

Recently I wrote a piece on financial services lies here at Above the Market. Lie #10 was “I don’t need help.” Here’s what I wrote about it.

American virologist David Baltimore, who won the Nobel Prize for Medicine in 1975 for his work on the genetic mechanisms of viruses, once told me that over the years (and especially while he was president of CalTech) he received many manuscripts claiming to have solved some great scientific problem. Most prominent scientists have drawers full of similar submissions, almost always from people who work alone and outside of the scientific community. Unfortunately, none of these offerings has done anything remotely close to what was claimed, and Dr. Baltimore offered some fascinating insight into why he thinks that’s so. At its best, he noted, good science (like good investing and good thinking) is a collaborative, community effort. On the other hand, “crackpots work alone.” Good collaboration among professionals and with good professionals by consumers improves investment outcomes, usually by a lot. A good professional can offer help with goals and plans, an Investment Policy Statement, asset allocation, risk management, behavioral management, protection from fraud (especially for seniors), and tax, estate and financial planning. We all need more help than we think.

A commenter calling himself (herself?) “pott” responded to that post as follows.

“Crackpots work alone” — a crackpot. https://www.quantamagazine.org/20150402-prime-proof-zhang-interview/ Damn right, mister.

Buster Olney is Biased

Bill Baer of NBC Sports created this wonderful image of tweets accusing ESPN’s Buster Olney of being biased against their teams…with 28 different teams represented. To hear the Twitterverse tell it, Buster is biased against everybody (and for everybody too) — just everybody else. Talk about confirmation bias and bias blindness! Great stuff.

H/T: The Big Lead

Make Fewer Decisions

WARNING: The following is real security camera footage and it is truly horrible.

In August of 2010, while visiting a shopping center in Daejon, South Korea, a 40 year-old wheelchair-bound man identified only as Mr. Lee just missed an elevator when the doors closed on him a moment too soon (as shown above). Angered at his misfortune, Lee backed up his motorized chair and rammed into the elevator doors. Unsatisfied at merely denting the object of his rage, Lee backed up and acted as human battering ram again. He “succeeded” this time, crashing through the doors and plunging to his death. Not surprisingly, shopping center officials vowed to strengthen the doors of their elevators in order to protect future morons.

If you’re like most people, you probably aren’t sure whether it’s appropriate to laugh at Lee’s stupidity or simply to despair at the loss of life (as well as the depth and extent of human stupidity). While most are not as flagrant as this one, it isn’t hard to find myriad examples of poor decision-making among the ranks of humankind. We make many such mistakes ourselves, even though we may not remove ourselves from the gene pool for having done so.

Our tendency towards poor decisions is a subject I write about often, even if and as our ability to overcome the behavioral and cognitive foibles and biases that so readily beset us is more than a little limited. Proposed remedies (or at least ameliorators) include implementing better choice architecture (such as slowing down and avoiding distractions), building better processes (checklists, for example), and cultivating a support system willing, able and eager to point out one’s errors. But even when we recognize our inherent weaknesses as a species, we tend to think that we’re somehow immune individually and readily discount the advice of those who suggest that we might be wrong.

One powerful and often overlooked corrective to poor decision-making should be obvious – make fewer decisions. This isn’t some paean to procrastination, however. It’s simple math. Fewer decisions means fewer bad decisions (which is particularly significant in that eliminating mistakes is demonstrably more important to good investment outcomes than making good choices).