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How to be wrong when you’re right

When evidence isn’t enough

Daniel Lane, Fidelity Personal Investing, 12 September 2019

We do something curious when we think we’re right. We tell ourselves we’re right to the extent that we start to bend any evidence we can find so it agrees with us. Even if it doesn’t. In fact, studies with live participants have even shown that when we are proven absolutely wrong we won’t accept the answer - if we have believed the incorrect one for long enough.

We’re a fickle bunch.

The problem often starts with how we try to back up our thoughts and opinions. When we set out to prove ourselves right as opposed to finding the objective truth, all we end up doing is entrenching our current views.

A good example of this is how we curate our social media feeds, clicking away information we don’t warm to and liking posts we do. All this does is steadily produce an echo chamber wherein the only posts that are surfaced to us are ones we agree with, meaning we’re never really challenged. In the run up to the 2016 UK referendum, analytics companies capitalised on this by looking at what we already thought and piling on more of the same, effectively securing our vote either way.

The real reason this happens is that the balance between opinion-forming and evidence-finding is skewed in our minds. Humans are lazy and so, we grab the quickest, easiest ideas first, and the more nuanced, complex ideas later, if at all. For investors, this can mean missing out on the glaring red flag in the company accounts because we stopped researching after we saw the headline growth figures.

Busting the bias

One way to address this is to find a devil’s advocate, someone who genuinely believes the opposite to you or just likes telling you you’re wrong. If you’re lucky like me, it won’t take you very long. In investment terms, make the counterargument in your head or on paper, look for the alternative opinion online or have a conversation with a friend or colleague about what the absolute opposite thesis is.

There’s also pre-mortem thinking wherein we imagine news has just broken that a company’s share price has fallen 50% - what do we think has caused it? What if you found out Warren Buffett had the opposite view to you - why might that be? If you can answer these questions before you even invest, all it’s doing is giving you a more balanced view of the actual investment case.

I’ve started to force myself to think of as many counterarguments as reasons before I make a decision. In theory, that means I have to do as much research into proving myself wrong as right.

And I might pick up something along the way that genuinely changes my mind, or if it doesn’t, I can feel reassured that my decision is based on reason, not bias.

Ask yourself whether you are being selectively sceptical or not. Are you justified in being sceptical and are you justified in feeling confident? It will take longer and your instinctive side will hate the extra work, but if you want to know whether an investment is sound or not, there really are no shortcuts.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

 

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