Benefits of Bad Behavior – Confirmation Bias

Benefits of Bad Behavior – Confirmation Bias

You may know someone who would rather not think about anything that upsets their impression of who they are.  Who am I kidding, it happens to all of us at one time or another!  Speaking for myself, I have a reputation to uphold and I don’t want to look dumb, weak, or to lose face.  I don’t want to behave in a way that is inconsistent with the way I see myself.  My opinion of my own character depends entirely on my judgement of my past conduct.

Thinking poorly of myself is so disagreeable that I may purposely turn my view away from any circumstances which may lead me to judge myself as unfit.  We can avoid the pain of accepting a loss or a failure and protect our reputation by sticking with our confirmation bias.  Warren Buffett says, “What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.”

When we are selectively looking for evidence that confirms our actions and beliefs while ignoring or distorting disconfirming evidence to the contrary, we are showing a bias for confirmation.

“The difficulty lies not in the new ideas, but in escaping the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”

John Maynard Keynes, (British Economist, 1883-1946)

The challenge we face as investors is to hear the story as it is told rather than the story we want to hear.  There is so much information to digest in our multi-media, sound bites only, hyper reality world that it is easy to reach conclusions which are increasingly distant from the inevitable circumstances which will prevail.

The more we have invested, the harder it is to change.

The more time, money, effort, or pain we invest, the more we feel the need to continue, and the more highly we value something – whether or not it is right.  Once we’ve made a commitment, we want to remain consistent.  We want to feel that we’ve made the right decision.  There can be a tendency to be consistent with our prior commitments and ideas, even when acting against our best interest.

When people hang onto bad ideas, they can stay in unhappy relationships, hang onto losing investments, and fight a war long after it becomes clear it is a bad idea.  When we add into the mix people challenging our decisions and our stated opposition we become even more committed that we are right.  The more individual responsibility we feel for a commitment or position we have taken, the harder it is to give up.

Public pronouncements and displays lead to an even greater entrenchment of beliefs.  Protesters, politicians, and advocates of religious beliefs come to mind as examples.  An ideology held fiercely can act as a device for justifying war and violence, yet alone reason enough to make an unproductive investment decision.  We simply don’t want to waste our efforts by willingly destroying our most cherished ideas, those which may be near and dear to our hearts.

The vulnerability of being trapped by a confirmation bias is far worse than the humility of dipping our toes in the waters of failure.  As Keynes also remarked, “There is nothing so disastrous as a rational investment policy in an irrational world.”  We can enjoy the false precision of being “right” fortified by a confirmation bias or we can continually strive to see things as they really are.

How to Benefit from Bad Behavior

Bias toward confirming pre-conceived ideas is hazardous to wealth and personal well-being.  First we need to protect ourselves by approaching every decision actively with a full plate of facts.  We need to be prepared to change when situations change, and to scramble out of wrong positions, quickly admitting when we are wrong.  The most important thing we can do when we find ourselves digging a hole is to quit digging.

Let’s ask ourselves where we want to be rather than looking at where we have been.  If we challenge our thinking, question ourselves critically, and be prepared to unlearn our best-loved ideas then we can consider alternative outcomes, viewpoints, and answers.  When we are presented with conflicting information or disconfirming evidence we can study it quickly and take the necessary action.

Finally, the best offense is a good defense – first we protect ourselves from our own bias.  Then we watch for the bad behavior in others.  It can be easy to spot opportunities exposed by bias when we remain focused on the end game, where we want to go, and the inevitable conclusion.  In short, we know what we want and move toward it.  Let’s keep in mind there will always be noise and speculation and when others are compelled to act on their bias, we can turn their adversity into our equal or greater benefit.

Another way to put it is that we let markets serve us, while others are blown around by markets.  We take advantage of the fat opportunities presented and we take a pass on the skinny deals that do not serve us well.  When the going gets tough, we are either taking advantage of the easy money or standing firm sticking to our knitting.

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