“I deserve good things, I am entitled to my share of happiness. I refuse to beat myself up. I am an attractive person. I am fun to be with.”
–Stuart Smalley, Saturday Night Live
Have you ever sat on the train (or in the bar or at a party) next to someone who wants to tell you about his next great investing idea?
He invariably is going to tell you why the idea is so great, but then he is also going to try to convince you that he’s done it all before. He’s trying to establish credibility for why you should listen to him this time because he wants to convince you that he’s found the next great thing.
Maybe he’s hoping to sell to the next sucker and doesn’t want to be the last one standing?
Whenever people like this try to tell you about how great their ideas are, they almost certainly are ignoring the other tons of investment ideas that they had, sank money into, and watched that money disappear down the drain.
It’s called confirmation bias, and it is very pervasive in all aspects of our lives.
Our friend Monkey Brain, what I call the limbic system in our brains, needs inherently to believe that he is right. Back in the good old days when we lived in caves and chased woolly mammoths, we faced decisions on a regular basis that involved life or death. Choose unwisely, and we wound up as mammoth chow.
Over time, we experienced survival of the fittest, and believed that what we decided (rather than, say, luck, or the help of others) was what got us to our grand state.
Back when we were deciding whether or not to attack the woolly mammoth or run away or whether that Neanderthal tribe next door was friendly or an enemy, we didn’t have a lot of time to ponder whether our decisions were wise or if we should strategically evaluate our outcomes. We made a decision, hoped it was the right one, and ran with it.
Therefore, right or wrong, we needed to believe that our ability to make decisions was flawless. No point in attacking the woolly mammoth if you were going to give it only 50% effort. You’d be mammoth chow.
Thus is the genesis of confirmation bias – we have this primal need to believe that our decision-making process is not flawed.
Unfortunately, confirmation bias can negatively affect us where it hurts the most – our pocketbooks. From “I don’t need no stinkin’ budget” to “I’m smarter than those guys on CNBC!” we tell ourselves narratives that make it hard for us to veer down the paths that we’ve chosen, whether or not they’re the right ones. Being told that we’re wrong poses a threat to our existence, at least according to Monkey Brain.
Monkey Brain: “INVESTING STRATEGY WRONG? NO…WILL DIE!”
You: “Ooh…I never thought of it that way! Double down on that investment! Charge (it)!!!”
But because Monkey Brain grew up in a world where decisions were simple – run or attack – he’s not really armed with the tools he needs to survive in a modern society. Thus, allured by the sexy appeal of making a ten bagger on pork snout futures penny trades, he convinces you to make some money decisions that aren’t usually in your long-term best interest.
So, saddled with a stubborn monkey on your back (or, rather, in your head), what is a normal, rational person to do in order not to fall prey to confirmation bias?