Bias Blindness Explained

Earlier today, I posted the following on Twitter, whereby I offered a 140 character explanation of bias blindness.

Jason Zweig, the wonderful columnist for The Wall Street Journal, added the following (and I agreed).

As Jason explained via email, “conscious control of unconscious bias is impossible…on an ad-hoc basis.”  Our best hope, we agree, is by instituting careful, blanket policies and procedures to combat them.

As Daniel Kahneman also argues, organizations are more likely to succeed at overcoming bias than individuals. That’s partly on account of resources, and partly because self-criticism is so difficult. As I have argued repeatedly, perhaps the best check on bad decision-making we have is when someone (or, when possible, an empowered team) we respect sets out to show us where and how we are wrong. Within an organization that means making sure that everyone can be challenged without fear of reprisal and that everyone (and especially anyone in charge) can be and is held accountable.

But that doesn’t happen very often. Kahneman routinely asks groups how committed they are to better decision-making and if they are willing to spend even one percent of their budgets on doing so. Sadly, as far as I know, he hasn’t had any takers yet. Smart companies and individuals will take him up on that challenge. Those that are smarter will do even more simply because there’s no substitute for good judgment.

Advertisements

Something Wicked This Way Comes

witchesAs my firm’s Chief Investment Officer, it’s my role (among other things) to provide thought leadership for the organization and its representatives – to outline and explain best practices and approaches with respect to the markets and investing.  Most fundamentally, if metaphorically, my job means standing up and pointing in the right direction.

I have been thinking a lot lately about how to do that more effectively, and the issue was highlighted for me anew yesterday during the outstanding Big Picture Conference here in New York City, hosted by Barry Ritholtz and Josh Brown. As part of the conference, Josh hosted a panel of Chief Investment Strategists: Dan Greenhaus of BTIG, Art Hogan of Lazard and Jeff Kleintop of LPL. All three were intelligent, engaging and very well-informed. Dan’s bio says he “is charged with evaluating both domestic and global macro trends as well as formulating top down investment strategies for clients.” That’s consistent with the way the role is typically conceived. As he put it on the panel, his job is to tell his clients what’s going to happen next. Of course, strategists do what they do for a much wider audience than that, as all are providing opinions regularly across media platforms, including television and radio financial news. They’re out to build their firm’s brand, and their own brand too.

Josh led the three of them on a brisk tour of the world markets.  They talked about macro risks and opportunities – what they think the immediate future has in store. And they were very good at it, impressively weaving together stories, themes and data into a powerful package of possibilities. It was wonderfully entertaining and even plausible. Some bits of it may even turn out to be accurate.

But my thumbs kept twitching (“pricking” in the Bard’s turn of phrase) throughout. Josh hinted at the inherent problem with the approach each took, suggesting that such moment-by-moment commentary and reaction is effectively meaningless.  I’d take Josh’s point one step further and call it wicked. Continue reading

Saving Investors From Themselves

JasonZweigColumnBugJason Zweig is the personal finance columnist for The Wall Street Journal.  His columns appear in the week-end edition of the Journal and are always well worth reading.  Last week he deservedly (if tardily) won a Gerald Loeb Award, the most prestigious in business journalism. But instead of my telling you that Jason is great, I suggest you merely read his most recent column.

Res ipsa loquitur

Here’s a taste.

I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.

That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.

The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.

Read it all.  Please.  As usual, it’s terrific.  It will be the best thing you read today, this week or this month.

Congratulations, Jason.  I am proud to call you my friend.

Sell Signal

SellIn 1993 I was still a relative newbie to the investment world, having made the move from practicing attorney to Wall Street trading floor the year before.  The junk bond market was very hot then – seemingly everyone was looking to get (more) involved.  The investment bankers were happy as bigger and hotter new deals kept getting done.  Traders and salespeople were happy because the markets were hopping.  And investors were happy because prices kept going up and cash kept coming into the junk market. 

Everybody was winning. Continue reading

Struggling With Clients

Cover Apr_0413.inddMy newest column is now available from Research magazine. Here’s a taste.

As [The Wall Street Journal’s Jason] Zweig emphasized, we are all social animals. It is natural and inevitable for most people to measure their success and status against their peers, and advisors are people, too. Yet the advisor who loses business to the competitor proposing an unrealistic approach and envies him “has already lost the battle. [Warren] Buffett likes to say that companies get the shareholders they deserve. Ultimately, every advisor has to be reconciled to the perennial truth that you get the clients you deserve.”

Surely the best advisors will need to listen more carefully, to provide excellent advice and recommendations based upon the most thoughtful research, and to make their points in a way that resonates with clients both intellectually and emotionally. That’s far easier said than done, of course. Long-term financial and retirement planning is difficult business. As Dana Anspach sagely added, “It is hard to plan for something when you don’t want it to happen.” Indeed it is.  

Struggling With Clients

Edge: Milevsky, Ritholtz, Zweig, Ferri and More

Edge QuestionThis year’s Edge question is What *should* we be worried about?  I put that same question to some of my friends. What should *we* be worried about?

Some of their shorter answer follow. Continue reading