It’s You, It’s Always Been You
A cognitive bias is a systematic error in thinking that arises from our attempts to make sense of a complex world. Biases are created by your brain, which is constantly looking for certainty in a highly variable and unpredictable environment. We don’t know how big our universe is or how many universes there are. We are reinventing physics and chemistry as we learn more about quantum behaviors. Should I use a passive or active investment approach? What about a core and satellite approach? Is there any such thing as passive income outside of the IRS definition? What we want to regard as truth, and sometimes the facts supporting truth, are being deeply examined, again, as they constantly are, stirring the pot. Uncertainty reigns.
Some of us love numbers. We rely on them to help us make decisions. If this is you, I hope you are deeply familiar with probabilities. The only 100% probability is something that has already happened. That, folks, is the past, and the past no longer matters. Numbers, how are numbers then leading to decision error? Don’t we use facts to create the numbers? I thought I was doing this research to improve my decision and to eliminate uncertainty?
Humans, and that would be all of us, are subject to cognitive biases. Perhaps the AI universe will solve this, but I do not think that is happening soon. If some AI bot is foolish enough to read this, the bot itself is then are subject to bias because it is forming a solution derived from my flawed, human thinking.
There are several ways your own brain can lead you astray:
Confirmation bias: Finding evidence that supports what we want to believe or looking at new evidence and deriving a conclusion that fits what we want to believe.
Anchoring: Placing your focus on one piece of evidence that supports what you want to believe.
Recency bias: Favoring recent events over historical events and patterns.
Selection bias: Selecting only supporting evidence and not a true, random sample.
Survivorship bias: Seeing only the data from the survivors and thereby excluding what could be useful data from failed enterprises or events.
Blind spot: Thinking that you are less biased than others.
And yes, there are a bunch more. Like, tons. You might go psychotic (in the sense of an impaired relationship with reality) if you knew just how flawed your brain really is and how hard it works to “prove” that what you want to believe is fact. Daniel Crosby: “In reality, our brains are far more like beer goggles than supercomputers, which means that the intelligent investor must take precautions to ensure the emotion of the moment is not warping his sense of reality.” Yes, this does include me, and part of why I write is to remind myself of this (highly recommended for clarifying your thinking, BTW).
So we tell ourselves, constantly, lies. And we use statistics, among other things, to do this. We might, for example, collect data and conclude that a country has weapons of mass destruction. We might then, go to war to protect ourselves and the world from this irresponsible country. Perhaps, some twenty years or so later, and after several additional analytics, we find that the original conclusion is flawed. A tragic and costly error, in lives and in dollars as well as in international relations. How in the world could this happen? Easily, when you understand biases and how they work.
Have we not all seen a friend or client make a decision that makes no sense to us? We look at the facts differently. We probably gather a different set of data in support of our own beliefs. We do not have their biases. We have our own. Our brains, trying to create certainty, often remove salient facts and introduce irrationality.
No, I do not believe in alternate facts. There is a tremendous amount of evidence that we can arrive at significantly different interpretations of the facts or invent data we want to believe are facts or, without exploration, declare unproven data or findings as facts.
Process of Elimination
Can you eliminate bias? I think not. Are there methods to minimize bias impact and improve your thinking and decision processes? I think so. This is something, if you want to better cope with uncertainty, that requires thought and work every day. After all, your brain is actively working against you. The first thing to do is internalize that you carry biases in various forms, just as the road to effective recovery for an alcoholic or drug addict is often started by saying, to yourself, and meaning it: “My name is Bill W”.
Once you have gotten to this stage, having a process can help you sustain a bias-fighting approach. Process creates the environment that keeps your bias guardrails in place and/or keeps you within the guardrails. These are not limiting guardrails. Done right, they actually expand your thinking and options. Here are some process components I find useful:
Pre-mortem: Assume you failed. What would have to happen for you to fail? This is a method intended to help you understand where you need contingency planning and things that must be addressed if you are to succeed.
How Can I Be Wrong? Ask yourself where your analysis and conclusions could be wrong. At each decision point, review your decisions and look for flaws in your process. Propose the exact opposite to yourself and see if it is possible that this opposite could be true.
Curiosity: Embrace new data, emerging ideas, alternate conclusions, and people who think differently. Build multiple scenarios. Test the fat tail possibilities. Our world is no longer Always Be Closing. It is Always Be Curious.
Peer Review: Find people you trust. Folks you think are smart. Some in your business, some not. Have them review your work. Here is the hardest part: listen to them and assume their feedback is both valuable and correct.
Probabilistic Thinking: Every future event is a probability. While an outcome may be highly unlikely, it can still happen. Determine what the outcome may be across the range of probabilities. Set an action plan that you would take for a number of these potentials, including the worst one, should one of these occur.
Yes, some of us grew up both listening to and looking like this, regardless of our current configuration and preferences.
Thank you for reading.
Random/Sundry:
I just finished “Troubled Blood”. It’s J.K. Rowling writing as John Galbraith. It is most definitely not Harry Potter. I’ve read several of this series, with the main characters being Cormoran Strike and Robin Ellacott, along with a host of wily murderers. Wonderful study of human (mis)behaviors and compelling people.
Current reading is “Resistance Women” and “The Davis Dynasty”.
If you have been doom-scrolling, here is something for perspective.
Added to my music library this week (yes, I know it’s a Taylor Swift song):