What you’re vacillatin’ between

Francis Paschal

Francis Paschal

When I was a first-year law student at Duke many years ago, my Civil Procedure professor was the delightfully named J. Francis Paschal. Professor Paschal seemed to like to portray himself as a bit of a good ol’ boy, with a protruding gut, truly dreadful sports jackets, hair slicked and parted just off-center, and a drawl as thick as molasses on a cold day (if not nearly so sweet). That image could not mask a keen mind and a sharp wit. Nor did it hide his erudition — in addition to his credentials in the law, Professor Paschal had a Princeton Ph.D. too.

The good professor led his classes using the Socratic conventions of the day. A student was called upon to answer a series of penetrating and perplexing questions supposedly designed to ferret out the nuances of some legal principle or another but which, in reality, served to demonstrate to a class full of bright and full-of-themselves college graduates that they were out of the minors and into the intellectual big leagues. If we were going to compete at that level, we needed to up our collective game considerably.

One day fairly early in the first semester Professor Paschal called on a woman in the row ahead of me (who I shall kindly refer to — using a pseudonym since she is now a Deputy Attorney General — as “Frieda Clancy”) and asked a typically impossible question. SInce Frieda was a friend, I happened to know that her extremely difficult predicament was actually utterly impossible because she was not prepared for class.  In fact, it wasn’t just that she wasn’t fully prepared (meaning that she had read the required case, all the cases cited therein, the case comments, casebook notes and citations, relevent hornbook and law review materials and anything else we could think of that might be relevant). She wasn’t prepared at all. She hadn’t even read the case at issue.

This was not likely to turn out well. Continue reading


Confirmation Bias Writ Large

Tomorrow evening Duke and North Carolina will renew the best rivalry in sports via a basketball game on the Duke campus (ESPN, 9pm ET).  As a freshman, Jay Bilas (now of ESPN) lined up for a foul shot in his first rivalry game next to then All-American and future NBA All-Star Brad Daugherty (and also a current ESPN-er), who looked over at him and said “I’m going to beat you like a rented mule.”  That comment was astonishingly mild as these things go.

CraziesI first sat in Cameron Indoor Stadium as a student in 1978 and didn’t miss a home basketball game while I was enrolled at Duke.  Every game was special – and wild.  NBC came to Cameron to do the first national telecast from the arena on January 28, 1979 for a game against Marquette (I was there, of course) and insisted on a time-delay so the crowd could be censored if necessary. But Duke v. Carolina was and is something else entirely. Continue reading

Top Ten Ways to Deal with Behavioral Biases

Pretty much since the day I wrote it, my Investors’ 10 Most Common Behavioral Biases has been the most popular post on this blog.  It still gets a surprising number of hits all these months later.  Due to the pioneering work of Daniel Kahneman and others, nearly everyone in the financial world acknowledges the reality of cognitive and behavioral biases and their impact on people, the markets and life in general. It’s a very popular subject.

Unfortunately, we don’t think that we are susceptible to them personally.

As I have noted before, we all tend to share this foible — the bias blind spot, which is our inability to recognize that we suffer from the same cognitive distortions and behavioral biases that plague other people.  As one prominent piece of research puts it:

We cannot attribute [our adversaries’] responses to the nature of the events or issues that elicited them because we deem our own different responses to be the ones dictated by the objective nature of those events or issues. Instead …. we infer that the source of their responses must be something about them.

In other words, if we believe something to be true, we quite naturally assume that those who disagree have some sort of problem.  Our beliefs are deemed merely to reflect the objective facts because we think they are true.  Our thought process goes something like this:

I’ve thought long and hard about it [biases leave no cognitive trace, after all] and I’m convinced I’m not a bigot.  Some of my best friends are __________.

Of course, that line of thinking doesn’t convince anybody else.  The research again:

We are not particularly comforted when others assure us that they have looked into their own hearts and minds and concluded that they have been fair and objective.

Of course not — they’re biased (but I’m not).  It’s the same kind of thinking that allows us to smile knowingly when friends tells us about how smart, talented and attractive their children are while remaining utterly convinced with respect to the objective truth of the amazing attributes of our own kids.

The problem is even more acute when the “answer” is counter-intuitive, and good investing is often wildly counter-intuitive (it’s really hard to sell when we’re euphoric or buy when we’re terrified, for example). So what can we do to try to minimize our own behavioral biases?  We can start, of course, by admitting what is obvious based upon the research and the data but so very hard to concede – we are all continually susceptible to cognitive and behavioral biases.

That’s great, so far as it goes.  But even though there is a great deal of research into the reality of these biases, there isn’t a lot written about what we might do to deal with them and counteract their impact.  That’s partly because there isn’t a lot we can do (as even Kahneman readily admits).

In his 1974 Cal Tech commencement address, the great physicist Richard Feynman talked about the scientific method — a careful and consistent process designed to root out error — as the best means to achieve progress.  Even so, notice what he emphasizes:  “The first principle is that you must not fool yourself–and you are the easiest person to fool.”

Even so, I am not eager to admit defeat. Therefore, I humbly offer the following ten suggestions to try to deal with our cognitive and behavioral biases. I hasten to emphasize that I offer them tentatively and without any assurance of success.  Dealing with bias is extremely hard.  Proceed with caution. But also bear in mind this insightful comment from Jeff Bezos of Amazon: people who are right a lot of the time are people who often change their mindsMuch of dealing with our biases is simply being willing and able to change our minds when its appropriate.  It’s hard, but the reward is huge — being right a lot.

  1. Focus on the Data. As I have said repeatedly (and I’m not alone in this), focus on the data.  As my masthead proclaims, I strive for a data-driven perspective and a data-driven process.   That isn’t easy to do, sadly.  We relate better to stories and are all too willing to believe and concoct narratives of various sorts to support our latest nonsense, but it’s a worthy aspiration and commitment nonetheless.
  2. Actively Seek Out Contrary Data and Conclusions. A remarkable universe of discoveries in psychology and neuroscience demonstrate that our preexisting beliefs skew our thoughts and even color what we consider our most dispassionate and reasoned conclusions. This tendency toward so-called “motivated reasoning” helps explain why we find groups so polarized over matters about which the evidence seems so clear.  In other words, expecting people (including ourselves) to be convinced by the facts is contrary to, well, the facts.  Factor in behavioral biases (such as the ever popular confirmation bias, optimism bias, in-group bias and self-serving bias) and it’s easy to see (at least conceptually) why we can get it so wrong so readily.  Our tendency is to look for and consider only those views that correspond to our own – which goes a long way towards explaining the popularity of Fox News and MSNBC, for example, while also explaining why the viewers of each of those networks tend to think that only the other side has it all wrong.  If we are going to be able to see things a bit differently, we need to seek out and consider sources that look at things differently.
  3. Build-In Accountability Mechanisms. We need (relative) objectivity if we are going to succeed in investing and in life unless we are extremely lucky. Having an accountability partner or (better yet) a competent and empowered team is particularly important due to our great ability to spot what’s wrong with everybody else (if not ourselves). It also means taking and dealing with criticism seriously.  Even welcoming and encouraging it.  It shouldn’t be surprising to see so many people who experience great investment success suffer indifferent performance or even failure subsequently (Bill Miller and John Paulson, for example).  The more success and power we achieve, the easier it is to believe the hype. Accountability mechanisms that are maintained and honored can help to undercut that.
  4. Focus on Process. Accountability is more effective when it’s part of a consistent, careful, clear and clearly defined process. We all recognize that the outcomes in many activities in life combine elements of both skill and luck. Investing is one of these.  Especially troublesome is our perfectly human tendency to attribute poor results to bad luck and good results to skill.  It’s a lead-pipe-lock that we’re going to err and err often in the investment world.  If we are to succeed with any measure of consistency, we need carefully crafted plans with screw-up contingencies built-in together with a commitment to regular re-evaluation and a rescue plan in the event of major catastrophe.
  5. Test and ReTest.  No matter how good our process is, we need also to assume that we have made errors and set out actively to find them by testing and confirming everything possible. Once we have decided that a given view is correct or committed to a particular course, confirmation bias has a tendency to take over.  Planning to be lucky and believing that psychological realities don’t apply to us is a lovely (if arrogant) thought.  But it’s not remotely realistic.  Keep testing and looking for ways that you’re wrong.
  6. Avoid the Noise.  Distinguishing signal from noise can be agonizingly difficult.  Given the sheer amount of stuff competing for our attention, eliminating distractions unlikely to provide substantive benefit will improve the likelihood of our success.  CNBC is fun and all, but how often does it make us smarter or better?
  7. Take a Tip from Attorneys.  I often refer to myself as a recovering attorney, and there is a great deal about the practice of law that is frustrating and silly.  But one excellent technique I learned from my time in that profession is to argue the other side’s case.  Understanding and even appreciating a contrary point of view is helpful to our own thinking and can provide a good check on the coherence of our own viewpoints. Understanding and seeking support for the opposition’s best arguments is a powerful learning tool.  We might even decide that – gasp – mistakes were made (almost surely by someone else, of course).
  8. Keep Track of Your Mistakes as Carefully as Your Successes.  We all tend to trumpet our successes and downplay our failures.  I highly suggest that, at least within your circle of influence and with those to whom you are accountable, you carefully track and analyze your failures, readily apparent or not.  Sometimes these mistakes will be the result of bad luck.  But often you will find correctable errors or even errors in your process.  Doing so also helps with #10.
  9. Take Your Time.  The more experienced and successful we are, the easier it is to take short-cuts.  Experience is what allows us to apply useful short-cuts, of course, but it’s important to remember that all behavioral biases and ideologies provide mental short-cuts of a sort too.  For big decisions, at least, make sure to take the time to connect each and every dot.  When I was in law school I often refereed basketball games for extra money.  Many situations were repeated time and again with the next action and the right call seemingly foreordained.  It was always difficult to avoid anticipating the call — blowing the whistle based upon what was highly likely (perhaps almost surely) to happen rather than waiting to see what actually happened.  Surprises happen on the basketball court with remarkable frequency.  They happen in investing too.
  10. Try to Stay Humble (no matter how successful you are). Even though it takes a healthy amount of self-confidence to be an investment success, arrogance and certainty are frequent enemies of continued investment success. Your accountability partners can and should help here, of course.  Spouses are especially expert at promoting humility. You will screw up and screw up often.  Remind yourself of that reality often as you continue to look for where your most recent failings took place.

It’s really hard to deal with (much less overcome) our cognitive and behavioral biases.  These tentative steps are offered to try to do so but I don’t promise anything like success.  Yet these steps (or an ongoing commitment to implement the concepts behind them) should put you well ahead of most everyone else.

And that’s a pretty good thing indeed.

Carolina Crazy

UNC fansWe all like to think that we carefully gather and evaluate facts and data before coming to our conclusions.  But we don’t.  As I have pointed out previously, we want to think that we’re like judges, impartially and painstakingly examining the evidence before making the best, most rational determination possible.  But we aren’t.  We’re much more like attorneys looking for any scrap of evidence or argument that we might use to help to support our preconceived notions, truth be damned.

Indeed, we all tend to suffer from confirmation bias and thus reach our conclusions first.  Only thereafter do we gather facts, but even so it’s only to support our prior commitments.  We then take our selected “facts” and cram them into our desired narratives, because narratives are crucial to how we make sense of reality.  They help us to explain, understand and interpret the world around us.  They also give us a frame of reference we can use to remember the concepts we take them to represent.  Perhaps most significantly, we inherently prefer narrative to data — often to the detriment of our understanding.  Keeping one’s analysis and interpretation of the facts reasonably objective – since analysis and interpretation are required for data to be actionable – is really, really hard even in the best of circumstances (the crucial point of Daniel Kahneman’s outstanding Thinking Fast and Slow).

I offer this introduction because college basketball season is upon us again and it provides a helpful predicate to a perfectly obvious conclusion: fans (including your humble author) are inherently irrational.  If we are exceedingly prone to various mental biases in life generally, when we’re in fan mode we can readily go off the rails entirely.  And when we’re in fan/rivalry mode, almost anything is possible.

I watched last week’s Duke v. Kentucky game in a bar in Minnesota (where I was on business).  I cheered, cried, cursed the evil John Calipari and his minions, and hated on the referees.  It took every bit of effort I could muster to avoid being a total jerk, especially when it became clear that UK was going down.

I’m not sure I succeeded.

Even so, no matter how much I love sticking it to Kentucky, it’s nothing like what a Duke v. Carolina game does to me.  With more than three decades of perspective from my school days, I can now see what a great coach and a great man legendary UNC-CH Coach Dean Smith was.  The objective facts demand as much.  He won a then-record number of games and did it “the right way.”  More importantly, he was instrumental in the fight for racial justice and equality even at a time when he didn’t have all that much clout.

But to me as a student in Cameron Indoor Stadium on game day wearing the correct hue of blue, he was an arrogant blow-hard who sanctimoniously talked down to opponents, intimidated officials and got all the calls.  Of course, now that Coach K has passed him on the all-time wins list, I’m a bit more willing to be gracious.  Even so, I’m still perfectly willing to argue that Dean — while terrific at recruiting and preparation — was overrated as a game coach.

So there.

It shouldn’t have been surprising, then, that when Duke’s Mike Krzyzewski and Pat Summitt were named Sports Illustrated magazine’s Sportsman and Sportswoman of the year, that announcement was met with more than a bit of skepticism and consternation by many UNC-CH fans.  After the news broke, I couldn’t help but take a peek at Inside Carolina‘s message boards for a bit of fan reaction, since internet message boards tend to take typical fan insanity and ratchet up the level of loony more than a few notches:  confirmation bias illustrated.

I was not disappointed.

Some representative comments follow.

  • “CongRATulations to coach summit.”
  • “To be fair, that Sweet 16 finish with the pre-season #1 last year was a pretty solid accomplishment.”
  • “Really.. Amazing!!  I guess it is sportsman-like to curse like a sailor at officials. I guess it is sportsman-like to teach players to flop to fool referees. I need a new definition.”
  • “Coach Rat would’ve been my 1,875,643,325,875,432…th choice.”
  • “Leave it to the rat to turn The SI Sportsman of the Year Award, a previously prestigious award, into just another cheesey award.”
  • “Does dSPN own SI too?”
  • “Sports Illustrated has hated us for years.”

Here’s my favorite:

I guess it makes sense, if the definition of sportsman is ‘a d-bag who denigrates referees’. K is like the WWF (the environmental group): both make more money than they deserve, both are rotten to the core, but somehow both are believed to be saints.

Of course, a silly Duke fan had to make a trollish appearance in the thread to tweak the faithful.  He noted that “I love any and everything that may ruffle the feathers of the Carowhina cheese and wine fans. Especially anything that pertains to Duke.”  That bit of delightful wit (Noel Coward’s legacy is not in danger) got him summarily banned from the site.

As fans, the more reasoned among us often try to “put some lipstick on the pig” and gussy-up our insanity with perfectly rational-sounding reasons why we are better than them, even though we have long-since decided that it is so, facts notwithstanding.  Indeed, some might argue that one of my favorite websites, the Duke Basketball Report, exists for precisely this reason (and I love it nonetheless).  It’s the bias blind-spot on full display.

As a Duke alum and fan, I’m resigned to the reality that lots of people (and especially those wearing the wrong shade of blue) are going to think that Coach K is evil, that Duke gets all the calls and that the Cameron Crazies are a bunch of over-privileged poseurs no matter what a truly objective analysis of the facts might show.  It’s both human and all but inevitable.

I’ll even go so far as to say that it’s perfectly okay to be utterly irrational about your favorite team.   We’re fans — as in fanatics — after all.

This is all well and good — true even.  But what do silly fans and our obsessions have to do with investing?  A lot, as it turns out.  You see, we’re not just talking about a fan thing.  It’s a human thing.

As investors — as people — we are prone to the same types of foibles, obsessions and foolishness as lunatic sports fans (isn’t that phrase redundant?). As noted off the top, we reach our conclusions first and then run around trying to support them. We talk our books the way fans talk up their teams.  We’re wildly overconfident about our books and ourselves.

Worst of all, even when we recognize our inherent weaknesses, we think they only apply to others.  With respect to the things we focus a lot of time and attention on — like our work — we tend to see “our side” as not just true, but obviously true. It’s a by-product of the bias blind spot.  Therefore, our strongly held positions aren’t really debatable — they’re objectively and obviously true.  After all, if we didn’t think our positions were true, we wouldn’t hold them.  And (our thinking goes) since they are objectively true, anyone who makes the effort to try should be able to ascertain that truth. Our opponents are thus utterly without excuse.

We’re fans of our books, of our investment approaches, philosophies, and of our styles no less than Carolina’s nonsensical and inherently crazy supporters are fans of their team.  Try desperately to bear it in mind (and deal with the reality accordingly) — as fans and as investors, we’re just as nuts as they are. Terrifying, isn’t it?