Board: Value Hounds
Robert Trivers is a Prof of is and Evolutionary Biologist, often considered one of the great thinkers of our time and his recent passion has been reconciling/researching self deception.
Interesting tidbits from his research:
- We will ignore data that we don't want to fit in our paradigm. Example, a major airline runway crash was caused when the pilot attempted to take off when his instruments clearly indicated he did not have enough speed. He ignored the data convinced that the instruments were wrong.
-If we are given a series of pro and con bullet statements related to a position we favor we will react strongly to and remember the pros and virtually not see the cons. When given a similar series but built from an opposing position we will react negatively and passionately to the pros while extolling the virtues of the cons.
These are two pitfalls that investors often fall into. We see the data or the news article and we over react or under react to it based on our biases. When we see positive news about company X that we follow or are invested in or about to purchase shares in we often over rate the value of that information. The data fits into what we already believe and so we deceive ourselves into believing we are smarter then we actually are and that the news is better then it actually is. Watch the market moves of a favored stock after a positive "surprise". The inverse is also true if we think company Y is a stinker for social conscious reasons or based on investing criteria we will often ignore the 5 positive press releases and/or upgrades and jump all over a "miss" or some perceived social misbehavior. We can watch similar market behavior in the reverse for stocks currently out of favor more importantly we can watch the tone and content of posts on the Fool or in articles published at seeking alpha.
This is probably at its most dangerous when we have a broader invested interest in a general area due to employment in the field or outside activism on our part. If we are convinced that printing presses of the US and other nations have gone wild printing money and are sure that this will not end well we probably over rate the value of gold and defend our thesis with more passion then is warranted convinced that we are passionately right for all the right reasons. If we hate Microsoft because it is an evil monopolistic empire then we are most likely going to focus our attention on its flat stock price while ignoring its ROE and its dividend. The peak oil folks slammed smack into this wall. All the while the peak oil argument raged there was plenty of solid evidence that fraking was yielding results and that oil sands and oil shale had significant untapped oil reserves. Its not that the "informed" didn't know of these issues its that they underrated their value while overrating the peak oil China and India are going to use it all argument.
The cure? Listen to the arguments of others when they oppose your thesis. True, some if not most that argue with you will be caught deep in this self deception trap and that doesn't mean their arguments are invalid. All that it means is that they cannot see your side of the argument and frankly that is their problem not yours. Our job is to turn information and ideas into money. Lower the risk to your portfolio by allowing others to keep you in check with data or arguments you knee jerk against. Why is your knee jerk reaction in opposition to their statements? What useful data are they providing that will help you watch your downside?
Just some Wed morning mulling.