Today's Investing for Survival

Investing for Survival

            12 things I learned from Morgan Housel: Part 12

12. “When you think you have a great idea, go out of your way to talk with someone who disagrees with it. At worst, you continue to disagree with them. More often, you’ll gain valuable perspective. Fight confirmation bias like the plague.”

“Starting with an answer and then searching for evidence to back it up.  If you start with the idea that hyperinflation is imminent, you’ll probably read lots of literature by those who share the same view. If you’re convinced an economic recovery is at hand, you’ll probably search for other bullish opinions. Neither helps you separate emotion from reality.”

“Charles Darwin regularly tried to disprove his own theories, and the scientist was especially skeptical of his ideas that seemed most compelling. The same logic should apply to investment ideas.”

I have always loved this Charlie Munger quote on confirmation bias: “Most people early achieve and later intensify a tendency to process new and disconfirming information so that any original conclusion remains intact. …The human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can’t get in. … And of course, if you make a public disclosure of your conclusion, you’re pounding it into your own head.” The trick is to really listen to other people who you trust. Ray Dalio’s investing process is very focused on this approach. Set out immediately below are two paragraphs on Dalio’s view:

“There’s an art to this process of seeking out thoughtful disagreement. People who are successful at it realize that there is always some probability they might be wrong and that it’s worth the effort to consider what others are saying — not simply the others’ conclusions, but the reasoning behind them — to be assured that they aren’t making a mistake themselves. They approach disagreement with curiosity, not antagonism, and are what I call ‘open-minded and assertive at the same time.’ This means that they possess the ability to calmly take in what other people are thinking rather than block it out, and to clearly lay out the reasons why they haven’t reached the same conclusion. They are able to listen carefully and objectively to the reasoning behind differing opinions.

When most people hear me describe this approach, they typically say, “No problem, I’m open-minded!” But what they really mean is that they’re open to being wrong. True open-mindedness is an entirely different mind-set. It is a process of being intensely worried about being wrong and asking questions instead of defending a position. It demands that you get over your ego-driven desire to have whatever answer you happen to have in your head be right. Instead, you need to actively question all of your opinions and seek out the reasoning behind alternative points of view.” 

Both Morgan Housel and Charlie Munger cite Darwin as a model for people working hard to avoid confirmation bias. Here’s Munger: “The great example of Charles Darwin is he avoided confirmation bias.  Darwin probably changed my life because I’m a biography nut, and when I found out the way he always paid extra attention to the disconfirming evidence and all these little psychological tricks. I also found out that he wasn’t very smart by the ordinary standards of human acuity, yet there he is buried in Westminster Abbey. That’s not where I’m going, I’ll tell you.”