Showing posts with label Confirmation bias. Show all posts
Showing posts with label Confirmation bias. Show all posts

Wednesday, October 25, 2017

These Five Cognitive Biases Hurt Investors The Most

There is no shortage of cognitive biases out there that can trip up our brains.


By the last count, Visual Capitalist"s Jeff Desjardins notes there are 188 types of these fallible mental shortcuts in existence, and they constantly impede our ability to make the best decisions about our careers, our relationships, and for building wealth over time.


BIASES THAT PLAGUE INVESTORS


In today’s infographic from StocksToTrade, we dive deeper into five of these cognitive biases – specifically the ones that really seem to throw investors and traders for a loop.


Next time you are about to make a major investing decision, make sure you double-check this list!



Courtesy of: Visual Capitalist

The moves that may seem instinctual for the average investor may actually be pre-loaded with cognitive biases.


These problems can even plague the most prominent investors in the world – just look at JPMorgan’s Jamie Dimon!


BIASES TO AVOID


Here are descriptions and examples of the five cognitive biases that can impact investors the most:


Anchoring Bias
The first piece of information you see or hear often ends up being an “anchor” for others that follow.


As an example, if you heard that a new stock was trading at $5.00 – that is the piece of information you may reference whenever thinking about that stock in the future. To avoid this mental mistake: analyze historical data, but don’t hold historical conclusions.


Recency Bias
Recency bias is a tendency to overvalue the latest information available.


If you heard that a CEO is resigning from a company you own shares of, your impulse may be to overvalue this recent news and sell the stock. However, you should be careful, and instead focus on long-term trends and experience to come up with a more measured course of action.


Loss Aversion Bias
No one wants to lose money, but small losses happen all the time even for the best investors – especially on paper.


Loss aversion bias is a tendency to feel the effects of these losses more than wins of equal magnitude, and it can often result in a sub-optimal shift in investing strategy. Investors that are focused only on avoiding losses will miss out on big opportunities for gains.


Confirmation Bias
Taking in information only that confirms your beliefs can be disastrous. It’s tempting, because it is satisfying to see your previous conviction in a positive light – however, it also makes it possible to miss important findings that may help to change your conviction.


Bandwagon Bias
No one wants to get left out, but being the last one to pile onto an opportunity can also be cataclysmic. If you’re going to be a bandwagon jumper, make sure you’re doing it for the right reasons.









Saturday, September 30, 2017

Every Single Cognitive Bias In One Infographic

The human brain is capable of incredible things, but it’s also extremely flawed at times.


Science has shown that we tend to make all sorts of mental mistakes, called “cognitive biases”, that can affect both our thinking and actions. These biases, as Visual Capitalist"s Jeff Desjardins points out, can lead to us extrapolating information from the wrong sources, seeking to confirm existing beliefs, or failing to remember events the way they actually happened!


To be sure, this is all part of being human – but such cognitive biases can also have a profound effect on our endeavors, investments, and life in general. For this reason, today’s infographic from DesignHacks.co is particularly handy. It shows and groups each of the 188 known confirmation biases in existence.





WHAT IS A COGNITIVE BIAS?


Humans tend to think in certain ways that can lead to systematic deviations from making rational judgments.


These tendencies usually arise from:


  • Information processing shortcuts

  • The limited processing ability of the brain

  • Emotional and moral motivations

  • Distortions in storing and retrieving memories

  • Social influence

Cognitive biases have been studied for decades by academics in the fields of cognitive science, social psychology, and behavioral economics, but they are especially relevant in today’s information-packed world. They influence the way we think and act, and such irrational mental shortcuts can lead to all kinds of problems in entrepreneurship, investing, or management.


COGNITIVE BIAS EXAMPLES


Here are four examples of how these types of biases can affect people in the business world:


Familiarity Bias: An investor puts her money in “what she knows”, rather than seeking the obvious benefits from portfolio diversification. Just because a certain type of industry or security is familiar doesn’t make it the logical selection.


Self-Attribution Bias: An entrepreneur overly attributes his company’s success to himself, rather than other factors (team, luck, industry trends). When things go bad, he blames these external factors for derailing his progress.


Anchoring Bias: An employee in a salary negotiation is too dependent on the first number mentioned in the negotiations, rather than rationally examining a range of options.


Survivorship Bias: Entrepreneurship looks easy, because there are so many successful entrepreneurs out there. However, this is a cognitive bias: the successful entrepreneurs are the ones still around, while the millions who failed went and did other things.

Monday, September 25, 2017

People Ignore Facts That Contradict Their False Beliefs

Authored by Eric Zuesse via The Strategic Culture Foundation,


The more people there are who ignore facts that contradict their beliefs, the likelier a dictatorship will emerge within a given country.



Here is how aristocracies, throughout the Ages, have controlled the masses, by taking advantage of this widespread tendency people have, to ignore contrary facts:


What social scientists call “confirmation bias” and have repeatedly found to be rampant, is causing the public to be easily manipulated, and has thus destroyed democracy by replacing news-reporting, by propaganda - ‘news" that’s false - in a culture where lies which pump the agendas of the powerful (including lies pumped by the billionaire owners of top ‘news’media and of the media they own) are almost never punished (and are often not even denied to be true). Thus, lies by those powerful liars almost always succeed at enslaving the minds of the millions, to believe what the top economic-and-power class want those millions of people to believe — no matter how false it might happen actually to be. 


Recently, a particularly stark example of this came to my attention. On 15 September 2017, an article that I wrote for the Strategic Culture Foundation, and which was titled by a true statement that I had only recently discovered to be true, was republished at a news-site that I consider one of the best around, “Signs of the Times” or “SOTT” for short, and a reader-comment there, simply rejected that title-statement and the entire article, because it contradicted what the person believes. This commenter entirely ignored the evidence that I had provided in the article, which proved the statement to be true. 


No matter how irrefutable the evidence is, most people reject anything which contradicts their deeply entrenched false beliefs, and this reader-comment crystallized for me, this phenomenon of “confirmation bias” — the phenomenon of ignoring evidence that contradicts what one believes.


The article was titled “Liberalism doesn’t respect a nation’s sovereignty.” I never knew that fact until I researched it, but I found, after looking through (and my article quoting key documents from) the history of the matter, that it’s actually the case: that liberalism (as it’s understood and defined by the scholars of the subject, and as it’s based upon the key formative documents of the historical tradition, “liberalism”) rejects a nation’s sovereignty. This fact shocked me to discover; so, I wrote an article documenting it, and SCF accepted it, and it then became republished at a few other sites, including SOTT.


The reader-comment at SOTT which for me personified confirmation-bias, was (in its entirety): “This is a rather new twist blaming liberals for invading countries. I"ve always associated liberalism with the left wing and democratic, progressive politics. I"ve always associated conservatism with the right wing, big business, militarism and invading other countries. Trying to move the goal posts, are we?”


That person never clicked onto my article’s links documenting the case, nor even read the quotations given in the article itself from John Locke and from Adam Smith, who were key founders of “liberalism” as that tradition has come down to us. He instead ignored all of that evidence, and stated — entirely without evidence of any sort — that I (and SOTT, and SCF, for publishing it) were “Trying to move the goal posts.”


I (a Bernie Sanders voter, and a lifelong progressive and opponent of conservatism) am “Trying to move the goal posts” — how? By pointing out the manufactured phoniness of ‘liberalism’? By pointing out a key way in which liberalism was designed by its aristocratic sponsors (in this case by the aristocrats who sponsored Locke and Smith), to be an ideology that would encourage conquest, empire, and discourage democracy (which is based upon the sanctity of national sovereignty — based upon the lack of imposition of government by or on behalf of anyone who isn’t a resident on the land). Liberalism, I show there, was designed for Empire, not for democracy. That reader simply refused to consider the evidence.


People who insist upon deceiving themselves disgust me. Anyone who blocks out the key relevant facts and persists in believing the lies they were raised with, or became fooled into believing, doesn’t harm only themselves by the lies they believe; they vote on the basis of the lies they believe, and thus these people who refuse to be open-minded destroy democracy, and invite control of the nation by the aristocracy (who sponsor the proponents of those lies). People who refuse to question their own beliefs, become increasingly putrid pools of their own false beliefs, which have been created and nurtured and sustained and become larger and larger pools of lies, by constant repetition from the media and lobbyists of the rich and powerful, so as to enable the exploiters to enslave the masses, via those constantly repeated and embellished lies. 


Such self-‘justifying’ fools, who refuse to clean-up their conceptual pool that’s been increasingly polluted by lies, are enemies of democracy, no matter how much they may consider themselves to be ‘liberals’. They don’t even know the reality of what liberalism is. One thing that it definitely is not (as my article documented) is progressivism (which is utterly opposed to foreign conquest and to the entire imperial project of imposed rule, regardless whether by outright invasions or else by coups).


Thus, we have two dominant ideologies against progressivism: One is conservatism, which everyone recognizes to be against progressivism and for Empire and constant conquest, profitable war for the arms-merchants and for the ‘news’media owners who also benefit from stirring up invasion-fever, not only like William Randolph Hearst did but today like they all do. The other is liberalism, which hides that it’s actually conservative — hides this, by being ever-so-sweet toward certain ethnicities or other groups that are being oppressed domestically, and by vociferously condemning conservatives for what is actually nothing more than the blatancy of conservatism’s favoritism toward the aristocracy.


An authentic democracy cannot be based upon a “demos” (a public) that is overwhelmingly composed of suckers - manipulated fools. Only by means of the tiny aristocracy plus the huge mass of their suckers, does a democracy degenerate into a fascism. (For example, something like this can be supported overwhelmingly by the political Party that dominates the U.S. Senate, the U.S. House, state capitals, state legislatures, and runs the U.S. White House, in this ‘democratic’ nation — ‘democratic’ according to the propaganda; but if this were really a democracy, then none of those politicians would be able to win public office.)


*  *  *


A well-established central finding of psychological research, concerning “confirmation bias” or “motivated reasoning” (which are two phrases referring to people’s tendency to believe whatever they want to believe, regardless of any contrary facts), is that individuals evaluate whatever they read or hear according to their pre-existing ideas about the given subject. Specifically, psychologists have found that people tend to pay attention to whatever confirms their existing ideas, and tend to ignore whatever contradicts those pre-established beliefs.


For examples, the following studies are available online:





“Motivated Skepticism in the Evaluation of Political Beliefs,” in the July 2006 American Journal of Political Science, reported: “We find a confirmation bias – the seeking out of confirmatory evidence – when [people] are free to self-select the source of arguments they read. Both the confirmation and disconfirmation biases lead to attitude polarization ... especially among those with the strongest priors [prior beliefs] and highest level of political sophistication [the highest degree of exposure to, and involvement in, the given subject-matter that the study was dealing with].” Prejudices were stronger among supposed experts than among non-“experts”: The more indoctrinated a person was, the more prejudiced. “People actively denigrate the information with which they disagree, while accepting compatible information almost at face value.” Moreover, “Those with weak and uninformed attitudes show less bias” (and this is actually one reason why the best jurors at trials are generally people who are not personally or professionally involved in any aspect of the given case – they are “non-experts”).



Sharon Begley’s article in the 25 August 2009 Newsweek titled “Lies of Mass Destruction: The same skewed thinking that supports a Saddam-9/11 link explains the power of health-care myths [such as that Obama’s health plan had ‘death panels’]” summarized the study in the May 2009 Sociological Inquiry, “‘There Must Be a Reason’: Osama, Saddam, and Inferred Justification,” which had surveyed, during October 2004, 49 conservative Republicans who admitted they believed that Saddam Hussein had caused the 9/11 attacks. This study found that 48 of these 49 extreme conservatives were utterly impervious to the overwhelming factual evidence which was provided to them by the presenters that contradicted this false belief they held.



A study concerning not political conservatism but merely resistance to new technologies is James N. Druckman’s “Framing, Motivated Reasoning, and Opinions about Emergent Technologies,” which was presented at a technological conference in 2009. He reported that, “factual information ... is perceived in biased ways ... (e.g., there is motivated reasoning).” “Facts have limited impact on initial opinions.” Moreover, “Individuals do not privilege the facts. ... Individuals process new factual information in a biased manner. ... Specifically, they view information consistent with their prior opinions as relatively stronger, and they view neutral facts as consistent with their existing” views.



“Motivated Reasoning With Stereotypes,” in the January 1999 Psychological Inquiry, found that, “When an applicable stereotype supports their desired impression of an individual, motivation can lead people to activate this stereotype, if they have not already activated it. ... People pick and choose among the many stereotypes applicable to an individual, activating those that support their desired impression of this individual and inhibiting those that interfere with it.” Similarly, another research report, “The Undeserving Rich: ‘Moral Values’ and the White Working Class,” in the June 2009 Sociological Forum, found that John Kerry had probably lost the 2004 U.S. Presidential election to George W. Bush at least partly because white working class voters overwhelmingly believed that Bush was like themselves because he behaved like themselves, and that Kerry was not like themselves because his manner seemed “snooty.”