“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?
Stuart Smalley Meets Monkey Brain
Lisa Legault of Clarkson University and a research team from Johns Hopkins University and the University of Toronto conducted an experiment to see if a simple action could change our ability to learn from our mistakes and avoid confirmation bias.
Your brain actually does have a pretty good b.s. detector. There’s a section of your brain called the anterior cingulate cortex, which, when it spots something wrong, emits a spike of electrical activity, called “error related negativity,” or ERN.
Usually, when Monkey Brain is at the wheel, ERN spikes are simply trees falling in the woods; they’ve never heard. Our brain emits electricity, lighting up like a Christmas tree, and Monkey Brain simply closes his eyes, puts his fingers in his ears, and hums to ignore the signals.
In the experiment, Legault and her team asked participants to either take part in an activity that increased self-affirmation (the “I’m good enough, I’m smart enough, and doggone it, people like me!” utterance that Stuart Smalley of Saturday Night Live makes) or decreased self-affirmation.
They were then asked to play a simple game where they’d occasionally make errors.
The participants who did the self-affirmation exercise performed better than the participants who did the exercise to reduce self-affirmation.
Furthermore, the ERNs were stronger in the group that did the self-affirmation than those who did the exercises that reduced self-affirmation.
The “WRONG” buzzer was louder after self-affirmation, and the participants who did self-affirmation were more ready to hear the buzzer.
But can you just do any old self-affirmation? Can you memorize Stuart Smalley’s lines and be good to go?
No. According to Dr. Leslie Ralph, if you’re going to do a self-affirmation exercise, then you need to focus your self-affirmation on remembering a time when you did something that created a positive outcome about “something of meaning and value to you.” You have to care and you have to believe that you can positively affect the outcomes of the things you care about for self-affirmation to work and for you to be receptive to learning from your errors.
Otherwise, you’re going to fall prey to confirmation bias, keep making the same mistakes over and over again, and wonder why you’re never making any progress. Soon, you’ll find yourself on trains and buses sitting next to random strangers trying to convince them of your next great stock investing idea.