[Image credit to Farnam Street]
We live in an age of seemingly infinite information. I tried to find the answer to “How much information is on the internet” and the numbers being referenced were beyond my cognitive ability to comprehend. Go ahead and Google it yourself.
And I’m not one to say this is necessarily a bad thing – but it is SOMEthing to be aware of. Because not all of this information is necessarily helpful. Some of it’s wrong. Some of it’s harmful. Some of it’s both.
When you compound this boundless amount of information with the of issue Confirmation Bias the result can be really dangerous – in our finances and in our general lives.
Confirmation bias is something that we all have, to some degree. It effectively is the tendency to search for and focus on information that confirms or conforms to our own preconceptions.
“What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.”
Warren Buffett
For example, if I think that Twitter is largely a helpful platform, I’ll be drawn to and believe research or studies that show it is, and subconsciously (or even consciously) reject studies that show otherwise.
If I believe the Steelers still have a shot at the playoffs this year as of October of 2019, I’ll buy into other sources that say the same. And reject, or at least diminish, the mountains of evidence against that theory this season.
If I believe stock buybacks are unethical – ehh, nevermind.
If I believe fee-only compensation – ehh, nevermind.
If I believe capitalism is – ehh, nevermind.
Ditto exercise programs, political issues, doctrine, child-rearing, and pretty much everything else in life that doesn’t have a black-and-white answer.
Further: our confirmation bias also frames how we ask questions. Which is a big deal, especially when we might do some research online. “Is Twitter good for the world?” is going to return massively different results than “Is Twitter bad?”
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As I said before, this has some really large implications in our life, including our finances. I’ll provide one small example – investing.
Let’s say we are evaluating if we should invest into Emerging Markets in our portfolios. And we start with Google, the financial advisor of the masses. But before we do that, what do we exactly ask?
If I Google “Reasons to invest in Emerging Markets” I get this results page:
If I Google “Reasons not to invest in Emerging Markets” I get this result page:
If I Google “Should I invest in Emerging Markets?” I get this result:
Site note: Props to Investopedia for an excellent search-engine-optimization strategy.
Depending on our baseline amount of conviction of investing in Emerging Markets, we’re going to most likely phrase our question in alignment with it – and will almost certainly interpret the results accordingly. And any other piece of information we inadvertently come across without proactively searching for it will only bolster our confirmation.
You can fill in the gap here with other investing idea – small-cap companies over large-cap, value companies over growth, technology sector over consumer staples, etc.
I’m only offering one example here for brevity sake – but you can apply the same principle to other areas of finance, such as debt management, or budgeting limitations, or term vs whole life insurance.
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I’m not a luddite. I think the evolution of technology to get us into the information age is largely a good thing – but what do we do about this conundrum with confirmation bias?
I propose two solutions
1- Seek out and understand the counter-argument.
If you have a high level of conviction on something, try and find something (or even better, someONE) who takes the opposite stance. And don’t read or listen in a way that you can attempt to destroy the position with counter-points, read and listen with the full intention of purely understanding in depth.
Warning – this could be hard, especially when talking to someone. Most of our online social platforms have evolved themselves to be largely echo chambers of others who share our own convictions in order to keep our attention on their site. And the online vibe can be pretty hostile – so try and take things privately when you can. I’ve seen very few public debates from opposing sides go well.
2 – Hold our own convictions loosely.
I think it’s a shame when people label others who change their mind or stance on something as wishy-washy, or weak. As long as the person isn’t just pandering to the masses, if they’ve grown in their understanding we should embrace that. New information sometimes leads to new results and new decisions. A lot of times it doesn’t – but we should hold our convictions loosely. Realize that we don’t know everything – and rather than trying to know everything, we should just, as Carl Richards says – just try to be less wrong tomorrow.
The caveat here – don’t confuse raw information with definitive evidence.
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Confirmation bias is very real – and sometimes it takes some effort to see it in our own lives, especially if we live or spend significant time in a community (online or in real life) that shares and reinforces beliefs or convictions.
And in this information age, it doesn’t take much effort to come across support for these beliefs. Which is why I believe it’s so important to spend time evaluating what the confirmation biases are, and making sure we understand the other side of the conviction along with those who hold them.
For a more thorough deep dive into confirmation bias, this Farnam Street piece is amazing.