Jun

24

The latest piece by market commentator James Montier looks at confirmatory bias. In the report, Montier discusses how confirmation bias pops up everywhere, giving examples from job interviews, the field of medicine, and criminal investigations. He provides a nice quote on the topic:

The human understanding when it has once adopted an opinion (either as being the received opinion or as being agreeable to itself) draws all things else to support and agree with it. And though there be a greater number and weight of instances to be found on the other side, yet these it either neglects and despises, or else by some distinction sets aside and rejects; in order that by this great and pernicious predetermination the authority of its former conclusions may remain inviolate.. . . And such is the way of all superstitions, whether in astrology, dreams, omens, divine judgments, or the like; wherein men, having a delight in such vanities, mark the events where they are fulfilled, but where they fail, although this happened much oftener, neglect and pass them by. — Francis Bacon (1620)

And there I was, thinking it was a relatively new insight to the human condition (I'm currently reading The Black Swan which deals with these themes and others).

Montier concludes with advice on how to fight confirmation bias:

The most obvious way of avoiding plunging headlong into confirmatory bias is, of course, to look for the disconfirming evidence. When you meet companies seek to ask them the complete opposite of what you actually believe. Root out all the information that would show you that you are wrong. So if you expect margins to continue to grow, say, then spend your time probing for evidence that margins are under pressure.

This is easy to say, but actually hard to practice. It doesn't come naturally to us at all. For instance, when I read a bearish piece of research I often find myself nodding in agreement. However, when I read bullish research I find myself, tutting and circling all the points I disagree with, often ending up with large amounts of ink across the page before I throw the note away, dismissing it as typical of the bullish junk produced by our industry. I'm not an unbiased evaluator of evidence (and the chances are that you aren't either).

You should also pay attention to the absence of evidence as well as its presence. This is reminiscent of the Sherlock Holmes story in which the vital clue was that the dog did not bark in the night. One's attention tends to focus on what is reported rather than what is not reported. It requires a conscious effort to think about what is missing but should be present if a given hypothesis were true.

I fear my life is an exercise in confirmation bias!

Russell Sears comments:

Well I would agree that it is hard to do, but I would say Mr. Montier is still asking the wrong question.  With the markets it's not all about you. It is not about what you think you know, it's about everybody and what everybody else is thinking. So the right question is to ask the company to prove what everybody else is saying about it. After all if you don't think that the consensus opinion could be wrong you should be in the index. But the hard part of the investment game is asking the right question, the one where the consensus is wrong. You could start by considering where are consensus opinions consistently wrong, and which companies are good at deception?   


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6 Comments so far

  1. George Parkanyi on June 24, 2008 8:41 pm

    But to what extent does desiring an outcome actually manifest it? Sports coaches say visualize your perfect run, perfect shot, perfect swing - whatever. Jim Carrie, when he was a kicking-about struggling stand-up act wrote himself a cheque for $1,000,000 to motive himself - and that wealth came to pass. Maybe half of us have read Napolean Hill’s “Think and Grow Rich”. Everything in that book is about visualizing and attaching intense desire to the outcomes in your life that you want. The premise of the book is that such concentration of thought (with some effort of course on your part) somehow attracts the resources to manifest the desired outcome.

    As a child and in school I would gaze endlessly at the stars and dream of being an astronomer. Instead, I ran out of gas in university, almost failed, then ended up in computing and even did a short stint as a stockbroker. Yet, when I flamed out at the latter in the 1982 bear market, a good friend suggested I apply for a job where he worked; they happened to have an opening for a programmer. I got the job - at Telesat Canada, writing the satellite and ground control system software that ran spacecraft, and ended up designing and coding a full sub-system myself, and co-designing with 5 others a full, integrated, next-generation system architecture. I was involved in 5 space shuttle launches where Telesat’s satellites were payload - culminating in a wonderful 3 month stint in Perth, Australia as part of the “away” team - probably the most fun I’ve ever had in any job. Finally, in 2003 or thereabouts, I vacationed with my family in Tucson, Arizona, and spent one night on the mountain at Kitt Peak Observatory - as an astronomer (my wife discovered they had a program where you could rent a “real” telescope for the night’s observing or photography, eat with other astronomer’s at the facility’s cafeteria, and rent one of the dorms to get some sleep in the morning). I still vividly remember the following morning, sitting on the doorstep of the observation dome watching the sun rise over the Arizona desert - exhausted and exhilarated, with photographs of a beautiful, impossibly distant galactic cluster in the bank, listening to Loreena McKennitt’s haunting and beautiful “The Mummer’s Dance”. It doesn’t get any better than that.

    I can think of so many examples in my life of things that I thought I might like to do or experience, forgot about, and then later had them actually came to pass - many without me consciously planning or orchestrating them. Try reaching back into the past and seeing if you have similar examples of your own. You may be surprised.

    So where does confirmation bias end, and creating reality begin?

    Cheers,
    George

  2. Curmudgeon on June 25, 2008 10:48 am

    You are right about The Black Swan. It is fun to read because of the author's sarcasm and wit, but it does not have any new ideas.

  3. Rob Steele on June 25, 2008 11:58 am

    “The point of having an open mind, like having an open mouth, is to close it on something solid.” –G.K. Chesterton

    Confirmation bias is a fact of life and not necessarily a bad thing. Think of it as hysteresis in your network of beliefs. If you let nodes flip back and forth too rapidly your map of reality goes all relative and you’re lost. That might be a good thing if you really are lost–kind of a global reset–but in general you don’t want to have to revisit first principles every time something new comes up. We haven’t got the brain power for it. On the other hand, to agree with the original point, we ought not become sclerotic and brittle to the point of ignoring screaming facts.

    Btw, the way we frame questions tells what we believe. We almost always say what we think is the case so that if we’re right we get a positive answer. That’s because of confirmation bias I guess. Knowing about it can help you understand people better.

  4. David Whitesel on June 29, 2008 9:22 am

    From the Bacon quote; And such is the way of all superstitions, whether in astrology, dreams, omens, divine judgments, or the like; wherein men, having a delight in such vanities, mark the events where they are fulfilled, but where they fail, although this happened much oftener, neglect and pass them by. — Francis Bacon (1620)

    imho Bacon wiffed by avoiding any proof what so ever, that these number of occurences, when skewed to failure, are proof of his opinion.

    Objects & or events, have current states, past states, and future states. To surmise at any moment that any given opinion should be cast aside due to an unconfirmed present, begs refute.

    The Black Swan has become an adopted shared meme, large numbers of folks are betting on the swan being black, at some impending moment. So Mr Tailibs idea has that magnetic property of animistic invitation, which draws statistical probability folks to the problem in hopes of a big pay day.

    Not all rare swans are black, nor black swans reliably rare.

  5. Confirmatory Bias and Oil Investing – Part Two | Daily Finance News - Forex Stock Market on February 18, 2010 5:26 am

    […] I recently came across a post on the Victor Niederhoffer Blog about the concept of Confirmatory Bias. I shall reprint the standard quote from Sir Francis Bacon that is used in much of the literature on this subject: […]

  6. Confirmatory Bias and Oil Investing – Part One | Daily Finance News - Forex Stock Market on February 19, 2010 2:17 am

    […] I recently came across a post on the Victor Niederhoffer Blog about the concept of Confirmatory Bias. I shall reprint the standard quote from Sir Francis Bacon that is used in much of the literature on this subject: […]

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