The Backfire Effect

InvestmentABCs1If you were wrong about something important, how quickly would you want to know and how quickly would you want to do something about it? Unfortunately, the answer isn’t nearly as obvious as we’d like to think.

Mark Twain sagely noted that a lie can travel half way around the world while the truth is putting on its shoes. That’s because the truth is so much messier. Lies are created to be believable. They cater to our prejudices, whims, desires and hopes even when the truth cannot. Lies offer a good story when the truth does not. They are plausible when the truth is not. We often resist and even deny the truth. It is inherently unwieldy. It requires a careful sifting and analysis of facts in order to be discerned — we want deduction but are limited to induction most of the time. The truth is simply very hard to handle.

Of course, if we’re talking about relatively trivial matters (perhaps the distance from the earth to the moon) or about something we’re predisposed to believe anyway, we adjust our beliefs quite readily. But when truth doesn’t fit with what is important to us — when it matters — our perception of it gets caught up in who we perceive ourselves to be and in our vested interests. In those instances, attacking false information with data and related evidence often backfires, having the opposite of the desired effect. We like to think that straightforward education overcomes falsehoods, but things aren’t nearly that simple. This horrifying phenomenon — the backfire effect — was demonstrated once again recently in a study of the responses of parents to various forms of reporting that vaccines are not dangerous. Continue reading

Shifting Baseline Syndrome

InvestmentABCs1A shifting baseline is a change with respect to how a system is measured or evaluated, usually against previous reference points (baselines), which themselves may represent significant changes from even earlier states.  For example, the price of coffee has seen a very significant baseline shift. A cup of coffee may have only cost a nickel in the 1950s, but with the advent of “premium coffee, the baseline is much higher today — $1.38 for brewed coffee and $2.45 for an espresso-based drink. Few of us look at current coffee prices based on the 1950s model. For most of us, our standard point of reference has moved and moved a lot. Continue reading

Framing

InvestmentABCs1According to the Major League Baseball Rulebook, Rule 2.00:

“The strike zone is that area over home plate, the upper limit of which is a horizontal line at the midpoint between the top of the shoulders and the top of the uniform pants, and the lower level is a line at the hollow beneath the kneecap. The strike zone shall be determined from the batter’s stance as the batter is prepared to swing at a pitched ball.”

But what looks at least reasonably clear on paper is anything but in practice.  Indeed, far from every strike called meets the above criteria (not that this is news to any baseball fan). This reality is based — in no small measure — upon how each pitch is “framed” by the catcher. Continue reading

Bias Blindness

InvestmentABCs1Try this experiment sometime. Ask an impartial observer – someone with no connection to any of the players – to go with you to a youth sporting event involving one of your children or grandchildren. Try to behave as you normally would but also watch and listen carefully, particularly to the conversations, attitudes and actions of the parents.

Then go to a game involving no kids or families you know with the same companion. Both of you should again try to be as observant as possible throughout, particularly with respect to the conversations, attitudes and actions of the parents.

After both games are over, discuss what you experienced with the observer — second game first. But read no further until after both games are over, nerves are calmed, tempers cooled and the games discussed. Ask the observer to read this entire entry before the first game and to direct your post-game analysis and conversation accordingly.

Continue reading

Motivated Reasoning

InvestmentABCs1There 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!”

Continue reading

Choice

InvestmentABCs1Calvin Miller says that choice is both the gift and the burden of each day.  In his words, it “dams the future.”  I first heard those words spoken and I assumed I had heard “damns the future,” implying that we make poor choices or are faced with impossible options, “damning” us with dreadful consequences.

How choice can damn the future is illustrated by Sophie’s Choice, a novel by William Styron (and a film by Alan J. Pakula) that considers Sophie Zawistowska, a survivor of Auschwitz whose two children, a daughter and a son, perish there.  Near the end of the book, Sophie reveals that upon entering Auschwitz, she was forced to choose which of her children would continue to live and which would immediately be gassed.  Sophie chose her daughter to die, a decision that would forever haunt and torment her, damning her to ultimate destruction.  A “Sophie’s Choice” is thus now an idiom for the necessity of choosing between two unbearable options.  Our choices can indeed damn us.

But Miller’s point was a more subtle (if less dramatic) one.  Continue reading

Investment Hell

InvestmentABCs1According to the great Swiss theologian Karl Barth, hell is having your own way and being stuck with it.  Investment hell is similar, except that there typically is a price at which escape is possible, if painful. Of course, we usually languish in investment hell far longer than we need to or should. Continue reading

Investment ABCs

InvestmentABCs1Today I am beginning an intermittent series of posts providing a look at certain Investment ABCs. The idea is that I will take a crack at providing pithy and I hope insightful definitions of various investment concepts and terms. I owe much to both Frederick Buechner’s Wishful Thinking (A Seeker’s ABC) and The Devil’s Dictionary by Ambrose Bierce for the approach, even though I can only aspire to their wit and talent.  You should be warned that these posts will likely tell you much more about me than about the stated object of my digital pen.