Behavioral New World (BNW)
May 1, 2022
Confirming two years of the BNW newsletter!
My first newsletter was published on May 1, 2020. I thank all subscribers, new and old, for staying tuned. By the way, you can read all the newsletters here:
https://johnhowe.substack.com/archive
You might also be interested in looking at my website: jshowe.com
That first newsletter described “confirmation bias,” which is one of the most fundamental biases in the world of research regarding behavioral finance. I say fundamental because its effects have been extensively researched over many decades. It is also one of those biases that most of us – when we first have the concept explained to us – stop and say, “Ah – yeah, that’s definitely true.”
Back then I was writing about the disparate beliefs that people held about the severity of the Covid-19 pandemic and the appropriate public health response. In the two years since, we’ve learned a lot about Covid-19 but, in my opinion, there is still a high degree of polarization about those issues.[1] Confirmation bias certainly has been a contributing and often vexing factor.
In this newsletter, I re-visit this fascinating bias and explore two other arenas in which it is particularly potent.
First, let’s consider the arena of politics and public affairs. Certainly any cursory exploration of modern politics will highlight the stark contrasts in beliefs among the public about what constitutes reality. As you might guess, I think these contrasts are at least in part attributable to confirmation bias, e.g., people listening only to or seeking out news and other information sources that confirm for them that their specific political views are accurate and laudable. Interestingly, a strong inclination toward this bias usually is accompanied by behavior on “the flip side” – that is, active attempts are made to shut out any information indicating that closely held views are in fact not accurate or laudable, either in whole or in part.
Among us humans, this bias appears to be our default-mode behavior, I’m sorry to say. We’d rather reside comfortably within a cushy belief bubble, with heavy doses of confirmation bias layered in to help keep that bubble intact, than burst it with a round or two of non-confirmatory input. We are generally comfort-seeking animals, both physically and – as in this case – mentally/emotionally.
However, there is massive downside to this state of affairs, the most important aspect being that we are unlikely to make good decisions if our worldview isn’t accurate. Hence becoming acutely aware of confirmation bias in its many forms and attempting to combat it is a worthwhile aim. One antidote is to let in—with a somewhat open mind at least—contrary views. For example, listen to news sources from across the political spectrum. And although it might not change your views, it is also worthwhile asking, “Why do ‘those people’ hold those opinions? What motivates them to believe that?”
Better yet, seek out sources of information that have a reputation for lack of bias, or at least reduced bias. Such sources pride themselves first and foremost on “credibility” rather than “controversy.” Even so, no matter the source, there is no substitute for listening deeply and questioning on a constant basis whether a fact or statement is as true as it purports to be.
Second, because I am a Finance professor, let’s consider how confirmation bias can influence our personal investment decisions. Consider the situation in which you bought a stock a year ago and today it sells for half what you paid for it. A common urge is, “I’ll wait until it rebounds to the price I paid for it and sell it then.” (This attitude is in part due to loss aversion, the subject of my July 1, 2020 newsletter.)
Given the hope of a rebound, it would be natural to tune out news that suggests that the stock price will not rebound. The company lost a record number of subscribers who are probably permanently lost? Don’t want to hear it. There was accounting fraud that vastly overstated the profitability of the company a year ago? Don’t want to hear it.
Confirmation bias is one of the mostly reliably documented cognitive biases we (all) are subject to. And in many ways one of the most dangerous ones. If you reject the notion that you are subject to this bias, it is probably because you become uneasy at the very notion (“who, me? No way!”). Such a reaction in itself strongly suggests that you are in fact subject to confirmation bias. Do I have you squirming yet? Good. That’s a start. To paraphrase one of the training tenets of the Navy’s SEALS, the path of virtue lies is getting comfortable with being uncomfortable.
Two months ago, I encouraged y’all to submit biases, real or fake, and I would publish them. Here’s this month’s:
Ilise Benun (https://www.marketing-mentor.com/pages/quicktips)
The Time Distortion Bias: Observed by newsletter writers who write a bi-weekly newsletter, but some readers think it is weekly, while others think it is monthly. This phenomenon has yet to be explained, but certainly applies in other circumstances; see https://connect.uclahealth.org/2022/03/22/was-that-yesterday-or-last-week-the-covid-19-time-warp-is-real/?campaign_id=9&emc=edit_nn_20220430&instance_id=60106&nl=the-morning®i_id=181510987&segment_id=90912&te=1&user_id=0700be3a79fa6a2c54f0abf455217987
[1] One thing I’ve learned over the past two years is that no-one associates Behavioral New World with Brave New World. Oh well, nice try. I’m grateful to Robb Corrigan, the co-author on my book The Foolish Corner, for talking me out of making that the title of our book.