The joy of being wrong and the danger of desirability bias

“Nobody likes to be wrong,” Daniel Kahneman told Adam Grant, who recounted their conversation during a recent interview, “But I enjoy being wrong, because it means that now I am less wrong than before.”

Grant describes Kahneman, the psychologist considered the creator and the biggest contributor to the field of behavioral economics, as “a living legend,” a noble label that Grant himself is sure to earn at any moment. So when these two wise men, known for being so right, talk about their enjoyment By making mistakes, it brings special comfort to those of us who find ourselves acknowledging our mistakes more often.

Being wrong sucks.

First, I love that they admit their humanity, not just that is it so occasionally bad, but that sucks a bit when understanding initially hits. Helpful humiliation often starts with a little pain. And one of the best ways to alleviate that sting is to recognize the benefits of being more straight into the future.

One of the greatest achievements of my career was also one of my most important lessons. I grew up professionally in financial firms that believed that the main justification for their existence was choosing the right stocks, bonds, and mutual funds at the right time for their clients. I really believed that this was the best use of our time and energy, until I was exposed to the evidence: that the vast majority of stock pickers don’t actually outperform their long-term benchmarks and that the allocation and reallocation of funds Assets are likely to only increase the cost that investors are virtually guaranteed to incur in pursuit of an “alpha” that is very difficult to sustain in the long term.

Having condition wrong can be great.

ESE was a humbling moment (courtesy of Larry Swedroe, an early champion of evidence-based investing). It hurt. And that’s because he really believed that he had the right answers to the right questions and was applying what he knew to the best of his ability. But that event sparked better questions with better answers and ultimately led to a series of enlightening moments later that, together, amount to an epiphany of financial planning … if there is such a thing. The end result has been to better help more people.

Great! So, considering the myriad benefits of “being wrong,” how can we be wrong more often? First, we must recognize why it is so difficult to acknowledge our mistake, and once again Kahneman’s work is our main guide.

Confirmation bias

Confirmation bias is our natural tendency to seek information that confirms what we already believe. We are more likely to dismiss something that would lead to doubt and to amplify something that would lead to certainty than to embrace unadulterated objectivity. This applies to all of our current beliefs, regardless of how they were formed. But this is where things get really interesting.

Desirability bias

If the confirmation bias is the selective screening of incoming information to support our current beliefs, the desirability bias is doing the same in support of something that we do. want in fact. If he researchers behind a study observed that people “updated their beliefs more if the evidence was consistent (versus inconsistent) with the desired outcome. This bias was independent of whether the evidence was consistent or inconsistent with their previous beliefs. “

That particular study focused on our political beliefs, but it is equally applicable to our dealings with money and investments. Whatever we want to call it, there is evidence that we are really good at fooling ourselves (although it is also important to note that our biases are not just signs of human brokenness and often come with associated benefits). So what is a solution?

Complexify?

While I believe that we do well to simplify many aspects of life and money, it can also be a mistake, especially in matters of thought that tend to boil down to two opposite sides.

“I’ve completely rethought it,” Grant says in the same interview. “Now I think that the perspective of both sides is not part of the solution, it actually exacerbates the problem of polarization.”

He continues: “This is largely due to the fact that it is very easy for us to fall victim to binary bias, in which you take a very complex spectrum of opinions and attitudes, oversimplify into two categories, and when you do, you know which tribe it belongs to. ; the other side is clearly wrong and can be too. It just makes people preach why they are right and prosecute everyone on the other side for being wrong. “

Rather than expanding our singular point of view, calcified by confirmation and desirability biases, into a dualistic battle royale that can only further harden our stance, Grant suggests that the solution is to explore other angles and points of view beyond our reach. : make it more complex. And they’ve seen this work in the Tough Conversations Lab, with many of the toughest debates on topics like gun control, abortion, and even more divisive material like the rivalry between the Yankees and the Red Sox.

Believe it or not, even in the nerdy world of financial planning, many topics within our advisory community get people excited: active investing versus passive investing, permanent versus term life insurance, control versus fiscal efficiency in investment. estate planning, to name a few. All of these nuanced themes are worthy of some complexity.

And you? Is there a problem or argument that I need to complicate? Is there a relationship that can help heal after a couple of years of intense polarization on issues of politics, race, masks and vaccines exploring other angles?

Here are 10 lessons of what they have learned in the Tough Conversations Lab that might help, and I also highly recommend Grant and Kahneman’s new books, Think again Y Noise, respectively.

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