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Defeating Your Biases

In an earlier post, I had talked about how damaging our natural human cognitive biases and belief systems can be to our ability to make reasoned, rational extrapolations about the future.

Now, the question is, what can be done about it?

Carry as few desired outcomes as possible. 

It is well known fact that human beings tend not to question information that tells them what they want to hear, and tend to ignore/attack information that tells them what they don’t want to hear.

If you are a “Right to Life” sort of person, you’re not going to want to hear about the theory of how legalized abortion has led to a drop in crime rates.    Yes, there are rebuttals calling their findings into question.  And if you have a vested desire for “Right to Life”, odds are incredibly good that you’re going to side with them and dismiss the original hypothosis.  If you’re a strict “Right to Choose” person, odds are really good that you’re going to dismiss the rebuttals and go with the original research.

Both sets of belief systems would have  all the while neglecting a third, and very likely possibility:  Both sides are right…. the original research is somewhat flawed, making the correlation not nearly as big as advertised, but still statistically significant.

But if you had no vested interest in the first place, you would be free to read and understand every side of the argument without the need to dismiss relevant information presented by either side because of a need to defend your value system.

How does that effect your real world financial decision making?  Missed opportunities.

Say you were one of (most) people that were very, very angry that banks got bailouts.    People that are angry, by the very nature of anger, are not able to think calmly and rationally about whatever subject is pissing them off.

And that means those people were almost certainly not clear-headed enough to follow that set of circumstances to their logical conclusion:  If a bank that was in trouble got a financial backstop from the government, that means that the chances of it going bankrupt in the near term has become zero.

And since that was a very real risk of any bank that was in that kind of trouble, you can expect that it had a very depressed share price.  And when that risk is removed, you can expect a big jump in the price of that stock pretty much immediately after the announcement.  I used that piece of logic to pick up 30%-in-two-day jumps in both Citibank and Bank of Ireland with almost zero risk.   All because I quickly scan over business news once a day, and don’t have a desired outcome making me unable to accept certain realities.

What else can we do to limit our cognitive biases?  Stay tuned.

One Comment

  1. Edvaldo says:

    can you give us some tips on how you did to make your blog so popular? thanks a lot.

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