One of the biggest mistakes an investor can make is ignoring or denying his or her biases.

The thought process through which most of us arrive at our view of the future is highly reflective of our biases. Given the unusually wide chasm between the optimistic and pessimistic cases at this time – and the impossibility of choosing between them based on facts and historical precedents (since there are none) – think about the role of bias.




Ignoring or denying your biases is a big mistake

One of the biggest mistakes an investor can make is ignoring or denying his or her biases. If there
are influences that make our processes less than objective, we should face up to this fact in order to
avoid being held captive by them.



Our biases may be insidious, but they are highly influential. 

Examples of "confirmation bias"

When I read articles about how difficult it will be to provide adequate testing for Covid-19 or to get support to small businesses, I’m pleased to see my wary views reinforced, and I find it easy to incorporate those things into my thinking.

But when I hear about the benefits of reopening the economy or the possibility of herd immunity, I find it just as easy to come up with counter-arguments that leave my concerns undented.


This is a clear example of “confirmation bias” at work:

• Once we have formed a view, we embrace information that confirms that view while ignoring, or rejecting, information that casts doubt on it. 
• Confirmation bias suggests that we don’t perceive circumstances objectively. 
• We pick out those bits of data that make us feel good because they confirm our prejudices. 
• Thus, we may become prisoners of our assumptions. (Shahram Heshmat, Psychology Today, April 23, 2015)

As Paul Simon wrote 50 years ago for the song The Boxer, “. . . a man hears what he wants to hear and disregards the rest.”



More examples of confirmation bias

• While I didn’t know the name for it, I’ve long been aware of my bias. In a recent memo, I told the story from 50 years ago, when I was Citibank’s office equipment analyst, of being asked who the best sell-side analyst on Xerox was. My answer was simple: “The one who agrees with me most is so-and-so.” Most people are unlikely to think highly of anyone whose views they oppose. So when we think about which economists we quote, which investors we respect, and where we get our information, it’s likely that their views will parallel ours.

• Of course, taken to an extreme, this has resulted in the unfortunate, polarized state in which we find the U.S. today. News organizations realized decades ago that people would rather consume stories that confirm their views than those that challenge them (or are dully neutral). Few people follow media outlets that reflect a diversity of opinion. Most people stick to one newspaper, cable news channel or political website. And few of those fairly present both sides of the story. Thus most people hear a version of the news that is totally unlike the one heard by those on the other side of the debate. When all the facts and opinions you hear confirm your own beliefs, mental life is very relaxed but not very enriching.

What’s the ideal? 

A calm, open mind and an objective process. 

Wouldn’t we all be better off if those things were universal?

Reference:

In investing, uncertainty is a given – how we deal with it will be critical. Read Howard Marks’s latest memo, in which he discusses the value of understanding the limitations of our foresight and “investing scared.”

https://www.oaktreecapital.com/docs/default-source/memos/uncertainty.pdf