Thursday, November 19, 2015

Confirmation Bia$

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The recent attacks in Paris, I hope we can all agree, were tragic.  As the friends and relatives of the victims continue to mourn, we turn on the news every morning to updates on the search for the suspected attackers.  And, in the aftermath, social media fills up with opinions on the Syrian refugees immigrating to America in search of a better life and, more importantly, peace.  Fear abounds as to whether potential terrorists will use the opportunity to enter the country and plot further attacks on our own soil. 

Log in to Twitter or Instagram to find yourself inundated with fiery opinions and impassioned debates of commenters either siding for or against the 31 governors who have decided to not welcome Syrian refugees into their states.  58 comment responses later and nothing has been resolved.  The end result:  a lot of mud-slinging, anger-fueled rage, hot tempers, and little resolution.  What we DON'T have is a significant amount of level-headed, clear minded, well reasoned discussion.  How does this happen every time a new hot button issue arises?  How do we not improve our ability to better resolve a discussion and not take the bait some attention seeking poster hangs out there in a Facebook rant?  Why, after so many of these episodes, do we still constantly let our emotions impede our reasoning?

Well, one reason might be that social media provides a platform for this type of conversation - a back-and-forth exchange where one can take time to flesh out his argument, use a thesaurus to find a bigger, more complicated word, and dial up a Wikipedia article or two to find under-scrutinized pieces of information to back his side prior to hitting "reply".  But the root of the problem goes deeper than that.  We are pushed to partake in these disputes because of Confirmation Bias.

Confirmation Bias can be explained as our constant search for information that only backs our point of view.  We become blind to information that doesn't back our opinion, regardless of the significance or validity of the information.  It creates a self-perpetuating cycle: we search for information that provides support to our argument, the information reinforces our behavior, and so, with stronger conviction than ever, we act in a manner to ensure the intended outcome is in our favor.  We read through the comments section of articles and Facebook discussions and focus only on the ones that we agree with.  We can't help ourselves but to jump in.

While confirmation bias is easily identifiable as it rears its ugly head in emotionally charged discussions such as the Syrian refugee crisis mentioned above, it can often affect us on a daily basis in areas that we don't even recognize. 

One example would be big purchases.  Say you and your spouse are discussing the purchase of a a new car.  You have your eyes set on a new Chevy Silverado but she has hers on a Ford Escape Hybrid.  Rarely will a commonsensical discussion ensue:

You:  But we'll be able to haul firewood and I can get a load of mulch to finally landscape the back yard.
Her:  The Escape gets better mileage.
You:  We can haul our future boat with the truck.
Her:  We can haul our future family in the SUV.

It's like neither one of you acknowledges the other's perspective, digging deep into your brain for the next one-upper.  Don't you think respectfully listening and providing feedback - on the part of both parties - would be a better use of your time?  You can hash out your differences and come to a reasonable compromise.  Instead, usually one partner gives up and you end up with a vehicle bought out of frustration that one person always resents.

Confirmation bias can also be extremely harmful when it comes to our financial decisions.

For example, consider the stock picking world?  I recently read an article about one of Seth Klarman's cohorts at the Baupost Group who is preparing to retire.  He reiterated in the article that the thing he'll miss most is working with highly intelligent, hard working coworkers on a daily basis, and stating that what sets Baupost apart from the rest was the culture of teamwork.  Baupost management knew that once a stock was recommended by one of the members of the research team, it may be a good time to hand off the recommendation to another team member for follow up, as confirmation bias would prevent the originator from considering new information that contradicted his original findings.  Baupost has been highly successful, likely due to the acknowledgement and recognition of this bias.  Researchers at other firms are often compensated for how their ideas shake out, creating a competitive environment where each individual researcher is wildly protective of his ideas.

While this phenomena occurs in competitive hedge fund offices, it can just as easily - maybe even more easily - occur on an individual basis.  You heard about a new stock that should "skyrocket!" because your respected dentist buddy told you about it at a social gathering.  Your research will likely consist of Google searches, "Will XXX skyrocket?"  Ok, maybe not so dramatic, but you get the point - you definitely will not be searching for "XXX bankruptcy risk".  No way!  You might see something you don't agree with!

To improve decision making, we need to be aware of when this bias begins to manifest.  Recognizing early on that we are not taking an even keel approach to a situation will allow us to properly react and head off a bad decision/outcome.  We can take a step back and openly consider other perspectives that we might not have otherwise been privy to, had we been blinded by our own confirmation bias.

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