The American Dunning-Kruger Epidemic (Or Why Ignorant People Are So Sure They’re Right)

This article was originally published by Daisy Luther at The Organic Prepper

It’s time to address an epidemic in the United States. It’s one that could be deadly, particularly to liberty.

It’s an epidemic of Dunning-Kruger. It’s why ignorant people are so certain that they’re right.

What’s that, you ask?

The Dunning Kruger effect is a cognitive bias in which individuals, who are unskilled at a particular task, believe themselves to possess above-average ability in performing the task. On the other hand, as individuals become more skilled in a particular task, they may mistakenly believe that they possess below-average ability in performing those tasks because they may assume that all others possess equal or greater ability. In other words, “the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others.” (source)

And haven’t we all seen that lately? Let’s look at a recent example right here in the good ole USA.

Those who haven’t lived like the rest of us are the ones shouting the loudest.

Let’s start with the current gun control debate.

We have high school kids who think they are experts on policy, firearms, and the Constitution, smugly telling us how clueless they believe we are.

We have movie stars who make millions from movies where they shoot people and who are protected by armed security guards, telling us that we law-abiding citizens who have guns are vicariously responsible for every school shooting that has ever happened.

We have wealthy city dwellers who live in buildings with doormen telling the rest of us that we’re nuts for wanting to protect ourselves.

And all of these people who want to loudly tell the rest of us how to live our lives have one thing in common: they are completely out of touch with the real world.

When you live in your guarded castles, you don’t have to worry about defending yourself from a rapist who might break in through your bedroom window. When you’re a kid, you can’t fathom the vast responsibility one feels as a parent to protect one’s children from home invaders or kidnappers. When you haven’t yet gone out there and lived your life with jobs and crime and financial instability, you have no idea what it’s really like for the average American.

And yet, these out-of-touch people are the ones screaming the loudest that only they know what is right for America.

And that’s where the Dunning-Kruger effect comes into play.

Back in 1999, social psychologists David Dunning and Justin Kruger of Cornell University performed tests on some subjects and discovered that in many cases, the lower the performance of a subject, the higher their confidence was that they had done well. They published their findings in a paper entitled, “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments.”

In an article by David Dunning called “We Are All Confident Idiots,” he wrote of his studies:

In 1999, in the Journal of Personality and Social Psychology, my then graduate student Justin Kruger and I published a paper that documented how, in many areas of life, incompetent people do not recognize—scratch that, cannot recognize—just how incompetent they are, a phenomenon that has come to be known as the Dunning-Kruger effect. Logic itself almost demands this lack of self-insight: For poor performers to recognize their ineptitude would require them to possess the very expertise they lack. To know how skilled or unskilled you are at using the rules of grammar, for instance, you must have a good working knowledge of those rules, an impossibility among the incompetent. Poor performers—and we are all poor performers at some things—fail to see the flaws in their thinking or the answers they lack.

What’s curious is that, in many cases, incompetence does not leave people disoriented, perplexed, or cautious. Instead, the incompetent are often blessed with an inappropriate confidence, buoyed by something that feels to them like knowledge.

This isn’t just an armchair theory. A whole battery of studies conducted by myself and others have confirmed that people who don’t know much about a given set of cognitive, technical, or social skills tend to grossly overestimate their prowess and performance, whether it’s grammar, emotional intelligence, logical reasoning, firearm care and safety, debating, or financial knowledge. College students who hand in exams that will earn them Ds and Fs tend to think their efforts will be worthy of far higher grades; low-performing chess players, bridge players, and medical students, and elderly people applying for a renewed driver’s license, similarly overestimate their competence by a long shot. (source)

Hmmm….that sounds familiar.

And the way Dunning applies this to politics vividly demonstrates why we have the polarization we’re currently experiencing in the US.

Some of our most stubborn misbeliefs arise not from primitive childlike intuitions or careless category errors, but from the very values and philosophies that define who we are as individuals. Each of us possesses certain foundational beliefs—narratives about the self, ideas about the social order—that essentially cannot be violated: To contradict them would call into question our very self-worth. As such, these views demand fealty from other opinions. And any information that we glean from the world is amended, distorted, diminished, or forgotten in order to make sure that these sacrosanct beliefs remain whole and unharmed…

…Political and ideological beliefs, too, often cross over into the realm of the sacrosanct. The anthropological theory of cultural cognition suggests that people everywhere tend to sort ideologically into cultural worldviews diverging along a couple of axes: They are either individualist (favoring autonomy, freedom, and self-reliance) or communitarian (giving more weight to benefits and costs borne by the entire community); and they are either hierarchist (favoring the distribution of social duties and resources along a fixed ranking of status) or egalitarian (dismissing the very idea of ranking people according to status). According to the theory of cultural cognition, humans process information in a way that not only reflects these organizing principles, but also reinforces them. These ideological anchor points can have a profound and wide-ranging impact on what people believe, and even on what they “know” to be true.

It is perhaps not so surprising to hear that facts, logic, and knowledge can be bent to accord with a person’s subjective worldview; after all, we accuse our political opponents of this kind of “motivated reasoning” all the time. But the extent of this bending can be remarkable. In ongoing work with the political scientist Peter Enns, my lab has found that a person’s politics can warp other sets of logical or factual beliefs so much that they come into direct contradiction with one another. (source)

And most importantly:

Sacrosanct ideological commitments can also drive us to develop quick, intense opinions on topics we know virtually nothing about. (source)

This isn’t just about gun control, though.

This article isn’t just about the hot-button topic of gun control. It’s about how we’re living our everyday lives.

Here’s an example: People either love President Trump so much they are unwilling to see any wrongdoing or they despise him to the point that they are unwilling to recognize any right-doing. Most people’s analyses of the actions of the President are completely warped by their sacrosanct ideologies of whether he is “good” or “bad.” They don’t weigh the merits of the actions – instead, they judge them from a place of deeply committed cognitive bias.

The same thing is true for many topics:

• Illegal immigration


• Freedom of speech


• Political ideologies


• Economic theories


• Gay rights


• Abortion


• The right to bear arms


• Taxes


• The bathroom drama at Target

All of us – myself included – can look at the list above and immediately say whether we are for or against these things, and what our specific belief is – but do we honestly know the details of these topics? Are our opinions sourced from cognitive bias or fact?

I have biases. You have them. We all do. However, the ability to recognize your own cognitive bias is the gold standard of intelligence.

This isn’t something that is going to change.

It’s completely normal for us to base our opinions on our own moral beliefs. As Dunning wrote, we are, at heart, either individualist or communitarian, hierchist or egalitarian. These are core attributes that would be difficult, if not impossible, to change.

But what we CAN do is make a conscious effort to catch ourselves when we make rapid judgment calls without the facts. We can educate ourselves on both sides of an issue and make an effort to use facts instead of feelings in our arguments.

What we CANNOT do is expect everyone to play by these rules. But that’s okay because by understanding how an opposing view was developed, we can use that to fuel our own arguments. We can call out the cognitive biases. What we can’t expect is for facts to change their deeply held beliefs, no matter how ignorant those beliefs might be.

We can correct the lack of information, but we can’t really expect someone with a confident, sacrosanct opinion to change their minds. They’ll hold on to a belief even after it is proven factually incorrect because, as Dunning said, “We are all confident idiots.” Remember, facts have nothing to do with why they have their points of view.

The good news is that there are folks in the middle, who may not have a deeply held opinion on hot-button topics. These are the folks who can be reached by logic and facts. It’s nearly impossible to battle confident ignorance, but with facts, you can influence people who are undecided.

If you ask me what is going to be the end of our civilization, the rampant epidemic of Dunning-Kruger seems to be the most likely cause. Let’s not be guilty of this confident ignorance ourselves. Let’s vow to inoculate ourselves with facts instead of enabling ourselves with emotional biases.

Hat tip to Suzanne

Please feel free to share any information from this article in part or in full, giving credit to the author and including a link to The Organic Prepper and the following bio.

Daisy Luther is the author of The Pantry Primer: A Prepper’s Guide To Whole Food on a Half Price Budget.  Her website, The Organic Prepper, offers information on healthy prepping, including premium nutritional choices, general wellness and non-tech solutions. You can follow Daisy on Facebook and Twitter, and you can email her at daisy@theorganicprepper.ca</e

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.

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.

Are We Really That Divided?

Authored by Charles Hugh-Smith via OfTwoMinds blog,

If we don"t challenge these poisonous polarizing binaries, they may well trigger the accidental suicide of our polity.

If there is any statement about politics in America that qualifies as as a truism accepted by virtually everyone, left, right or independent, it"s that America is a deeply divided nation. But is this really true?

Like everyone else, I too accepted that the line between Hillary supporters and detractors, and Trump supporters and detractors, was about as "either/or" as real life gets.

But are we really that divided? A fascinating 55-minute lecture by historian Michael Kulikowski entitled The Accidental Suicide of the Roman Empire has made me question this consensus certitude.

Maybe the real driver of this division is devisive language--more specifically, language that is designed to drive a wedge between us. In other words, maybe the divisions are an intentional consequence of the language we"re using.

Kulikowski makes a number of nuanced arguments in his talk, but his primary point is that the late-stage Roman Empire collapsed partly as an unintended consequence of rhetorical binaries, polarizing rhetoric that lumped an extremely diverse Imperial populace into false binaries: Roman or Barbarian, Christian or heretic, and so on.

The actual lived reality was completely different from these artificial either-or binary classifications. As Kulikowski explains (and anyone who has read a modern history of late-stage Rome will know this from other accounts), many "Roman generals" were "Barbarian" by birth, and the boundary between "Roman citizen" and "Barbarian" was porous on purpose.

Rome had prospered by ensuring the boundary was porous (not counting slaves, of course). An impoverished young man from the hinterlands could join the Roman military and achieve a stable income and Roman citizenship. (Women could advance through marrying into a Roman-citizen family--even one that was "Barbarian" until recently.)

By Imperial decree in the 3rd Century A.D., any free person inside the boundaries of Imperial Rome was declared a Roman citizen. So numerous people of a variety of ethnicities may have been born outside the boundaries (i.e. Barbarian) became as "Roman" as any native born Roman in terms of their obligations to pay taxes and rights to judicial review.

This social/economic upward mobility was a key "secret sauce" of Rome"s enduring success.

So why the sudden fatal attraction to completely false polarizing binaries? Kulikowski makes the case that deploying these rhetorical devices--polarizing binaries-- served the political purposes of warring elites within the Imperial aristocracy.

For example, one sure-fire way to undermine a political challenger was to label him as a "Barbarian." Even though he might have served in the Roman army from his youth, his political opponent could transform him into a "bad guy" by virtue of his being born a non-Roman. Sound familiar? (Hint: try "deplorable".)

There is a self-destructive, self-reinforcing dynamic in this polarizing rhetoric: though it served the political interests of individual members of the elite, it did so at the cost of the entire polity, which was poisoned by these false binaries that then developed into dominant narratives.

Hence Kulikowski"s startling conclusion: Rome didn"t "die of natural causes"--it accidentally committed suicide once its political elites embracing polarizing binaries as political weapons. These weapons seemed targeted to their users, but the rhetorical narratives spread like a deadly virus through the empire, helping to trigger collapse of the Imperial core.

Bloomberg-BusinessWeek published a major multiple-part story in September of 2016 prior to the election entitled One Nation Divisible: The American Electorate.

The story repeats the truism of America being a divided nation, but my take-away was not the either-or binaries accepted by the mainstream and alternative media alike-- my take-away was a newfound appreciation for the incredible diversity in America, not just ethnically, but geographically, demographically, and in every other measure of complex diversity.

How could a nation of such astounding diversity be artificially cleaved into polarizing binaries? The short answer is that it cannot: the polarizing binaries are artificial rhetorical devices, completely out of touch with the nuanced, complex reality of a diverse populace with widely diverse opinions on a wide spectrum of political topics.

My conclusion is that we should be alert to the great distance between these politically useful but systemically poisonous polarizing binaries and the complex and dynamic realities of the American populace.

We would also benefit from recognizing the artificiality and self-serving nature of these polarizing binaries, and be alert to the false and destructive narratives and teleologies they generate.

For more on narratives and teleologies, please read my recent essay The Deep State"s Dominant Narratives and Authority Are Crumbling.

We"ve already witnessed the toxic weeds of polarizing binaries spreading across the political landscape, choking out real-world narratives: diverse populations are being demonized as "deplorables," "racists," "evil," and so on. So many of our choices are false choices based on polarizing binaries. For example-- how many voters would have championed an alternative to Hillary or Trump? If given a choice, would 60% of the voters have chosen someone other than the two party candidates? (Hint: Bernie Sanders is the most popular politico in America, according to recent polls.)

Identity politics is another rhetorical device designed to consolidate diverse populaces into politically useful (to the elites jockeying for power) binary blocks: you"re either "for us" (and good) or "against everything good" (bad, evil, racist, etc.)

If we don"t challenge these poisonous polarizing binaries, they may well trigger the accidental suicide of our polity. THe saying is the demographics is destiny; the same can be said of the language we use to divide or unite people of good faith who are sick of the parasitic, predatory elites that are plundering the nation.

Trumpocalypse: Liberal Ivory Tower of Academia collapsing

Universities in America have typically been dominated by a liberal
bias.  Why is that?  Because, working for a University is sort of
like working for the Government.  There is reason for the expression,
those who can"t do - teach.  Grow a 2nd brain - understand why by reading THIS BOOK. 

The mindset of employees at such insitutions is quite different
than one might think.  We"re not going to name any names in this essay; this
isn"t about a person or individual University.  It"s about the
intellectual class, really the only public intellectual class in America with
any respect; the Ivory Tower.  If you haven"t heard this expression
before, it refers to the high brow raised lip attitude class of University
Professors and their associates.  They have influence on every aspect of
society.  They are like Adam Smith"s hidden hand - the subtle advisors who
are secretly directing politics, big business, technology, and culture.
 Fortunately however, they don"t have any power, and don"t really control
society, like the Illuminati do.  Their influence however should be noted;
they"ve influenced Presidents of the United States, Bankers, the Media (most
notably) and literally every aspect of human life in America.  I mean, who
doesn"t trust and respect a University Professor?  They know what they"re
doing - right?

From Google:

a state of privileged seclusion or separation from the facts and
practicalities of the real world.

"the ivory tower of academia"

Now to be fair, not all University Professors are alike, we shant
"profile" them, as they profile individuals who have ideas they don"t like.
 There"s do-ers out there, especially around Silicon Valley where many
have left their Ivory Tower positions to join startups or start them
themselves.  But the Ivory Tower class remains; and it remained until the
Trump victory in November - a major influence on society and hallmark of
American culture.  But all that"s been shattered.  Their hidden
influence on the media, should be noted by readers of Zero Hedge and other
sites, people "in the know".  Because they shape public opinion, possibly
more than the CIA with all of it"s domestic mind-control operations.
 Venues like "NPR" and even "The Simpsons" are
carefully crafted with leftist messages, agendas for open expansion of foreign
affairs, expansion of government, anti-male value systems, and other
"progressive" ideas are implanted like seeds, waiting to grow like weeds when
the next rain comes.  

Here"s one example, how Academia helped the Media with their war
against Trump.  Have you been hearing recently "Studies show
that.." .. "Obamacare is more popular after the election"
 or some such nonsense.  Who are they polling?  They claim their
polls aren"t biased, they are scientific.  But these are the polls and methods that had
Trump losing by a landslide!

What does this all mean?  We"re experiencing a
major paradigm shift, (this is an Ivory Tower word, from Thomas Kuhn"s "The
Structure of Scientific Revolutions - a must read for investors).

As a bright example take
a look at what Brian Nosek is doing to crack the glass bubble surrounding the Ivory Tower:

Sometimes it seems surprising that science functions at all. In
2005, medical science was shaken by a paper with the provocative title “Why most published research findings are false.” Written by John Ioannidis, a professor of medicine at Stanford
University, it didn’t actually show that any particular result was wrong.
Instead, it showed that the statistics of reported positive
findings was not consistent with how often one should expect to find them. As Ioannidis concluded more recently, “many published research findings are false or exaggerated, and an
estimated 85 percent of research resources are wasted.”  It’s likely that
some researchers are consciously cherry-picking data to get their work
published. And some of the problems surely lie with journal publication
policies. But the problems of false findings often begin with researchers
unwittingly fooling themselves: they fall prey to cognitive biases, common
modes of thinking that lure us toward wrong but convenient or attractive
conclusions. “Seeing the reproducibility rates in psychology and other
empirical science, we can safely say that something is not working out the way
it should,” says Susann Fiedler, a behavioral economist at the Max Planck
Institute for Research on Collective Goods in Bonn, Germany. “Cognitive biases
might be one reason for that.”  Psychologist
Brian Nosek of the University of Virginia says that the most common and
problematic bias in science is “motivated reasoning”: We interpret observations
to fit a particular idea. Psychologists have shown that “most of our reasoning
is in fact rationalization,” he says. In other words, we have already made the
decision about what to do or to think, and our “explanation” of our reasoning
is really a justification for doing what we wanted to do—or to believe—anyway.
Science is of course meant to be more objective and skeptical than everyday
thought—but how much is it, really?  I
was aware of biases in humans at large, but when I first “learned” that they
also apply to scientists, I was somewhat amazed, even though it is so obvious.  Whereas the falsification model of the
scientific method championed by philosopher Karl Popper posits that the
scientist looks for ways to test and falsify her theories—to ask “How am I
wrong?”—Nosek says that scientists usually ask instead “How am I right?” (or
equally, to ask “How are you wrong?”). When facts come up that suggest we
might, in fact, not be right after all, we are inclined to dismiss them as
irrelevant, if not indeed mistaken. The now infamous “cold fusion” episode in
the late 1980s, instigated by the electrochemists Martin Fleischmann and
Stanley Pons, was full of such ad hoc brush-offs. For example, when it was
pointed out to Fleischmann and Pons that their energy spectrum of the gamma
rays from their claimed fusion reaction had its spike at the wrong energy, they
simply moved it, muttering something ambiguous about calibration.

The implications for politics and the broader economy are huge.
 Studies, focus groups, corporate funded research retreats, are one of the
Establishment"s, and the Ivory Tower"s biggest tools.  The election was a
crack in the dam - it"s a proof that you can"t manipulate public opinion to fit
your own.  But it"s far from the only crack, just the most obvious one.  What"s
happening is a major system-wide Ivory Tower Psychosis, the most basic form of
mental illness - but it"s happening at a class level, as a group.
 Emotionally injured leftists are fleeing to Canada, or promoting
secession for California (which is really a good idea by itself, who needs a
Federal government).  Reality is crashing down on them, as it doesn"t fit
with "their reality" - but "their reality" was artificially created for
decades, depending on how you calculate.. For decades, Establishment leaders like
George Bush created their own reality with their power, and even called it the "Reality Based Community" that is, people who live in
the bubble of the Ivory Tower:

The aide said that guys like me were "in what we call the
reality-based community," which he defined as people who "believe
that solutions emerge from your judicious study of discernible reality."
... "That"s not the way the world really works anymore," he
continued. "We"re an empire now, and when we act, we create our own
reality. And while you"re studying that reality—judiciously, as you will—we"ll
act again, creating other new realities, which you can study too, and that"s
how things will sort out. We"re history"s actors…and you, all of you, will be
left to just study what we do."

It"s like the Media"s recent admission that it"s the media"s job
to control what people think.  Well, not exactly.

The Ivory Tower Bubble has popped; and we"re seeing the casualties
on a daily basis.  It"s certainly not the last establishment-class that
we"re going to see crack from the pressure of reality.

To
learn how the Elite manipulate the news which in turn manipulates markets,
checkout Splitting Pennies - Understanding Forex for only $6.11 on Amazon, also
now available on your iPhone via Smashwords.

Zero Hedge readers get 35% off Fortress Capital Trading Academy type
coupon code spring17 when checking out, at www.fctradingacademy.com learn how
the "real" world works.

Deep Thoughts From Howard Marks

Submitted by Lance Roberts via RealInvestmentAdvice.com,

One of my favorite investing legends is Oaktree Management’s, Howard Marks. His investing wisdom have been a major source of education over the years and his deep knowledge and understanding of investor psychology and market dynamics is truly unparalleled.

This past weekend, I was digging through some old research and ran across an interview between Goldman Sach’s Hugo-Scott Gall and Howard Marks on everything from investment decisions to behavioral dynamics.

This interview was originally done back in 2013, and interestingly enough it is just as relevant today as it was then. I hope you find this as informative and educational as I did.

---

Hugo Scott-Gall: How can we understand investor psychology and use it to make investment decisions?

Howard Marks: It’s the swings of psychology that get people into the biggest trouble, especially since investors’ emotions invariably swing in the wrong direction at the wrong time. When things are going well people become greedy and enthusiastic, and when times are troubled, people become fearful and reticent. That’s just the wrong thing to do. It’s important to control fear and greed.

Another mistake that people often make is that they compare themselves with others who are making more money than they are and conclude that they should emulate the others’ actions … after they’ve worked. This is the source of the herd behavior that so often gets them into trouble. We’re all human and so we’re subject to these influences, but we mustn’t succumb. This is why the best investors are quite cold-blooded in their professional activities.

We can infer psychology from investor behavior, and that allows us to get an understanding of how risky the market is, even though the direction in which it will head can never be known for certain. By understanding what’s going on, we can infer the “temperature” of the market. In my book, I give a list of characteristics that can give you an idea whether the market is hot or cold, and by using them we can control our buying patterns. They include capital availability, the eagerness of lenders and investors, the ease of entry for new funds, and the width of credit spreads, among others.

We need to remember to buy more when attitudes toward the market are cool and less when they’re heated. For example, the ability to do inherently unsafe deals in quantity suggests a dearth of skepticism on the part of investors. Likewise, when every new fund is oversubscribed, you know there’s eagerness. Too little skepticism and too much eagerness in an up-market – just like too much resistance and pessimism in a down-market – can be very bad for investment results.

Warren Buffett once said,

“The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs.”

I agree thoroughly, and in order to understand how much prudence others are applying, we need to observe investor behavior and the kinds of deals that are getting done. In 2006 and 2007, just before the onset of the financial crisis, many deals got done that left me scratching my head. That indicated low levels of risk aversion and prudence. We can’t measure prudence through a quantitative process, and so we have to infer it by observing the behavior of market participants.

The fundamental building block of investment theory is the assumption that investors are risk averse. But, in reality, they are sometimes very risk averse and miss a lot of buying opportunities, and sometimes very risk tolerant and buy when they shouldn’t. Risk aversion isn’t constant or dependable. That’s what Buffett means when he says that when other people apply less, you should apply more.

---

Hugo Scott-Gall: Why do behavior patterns and mistakes recur despite the plethora of information available now? Are we doomed to repeat our mistakes?

Howard Marks: Information and knowledge are two different things. We can have a lot of information without much knowledge, and we can have a lot of knowledge without much wisdom. In fact, sometimes too much data keeps us from seeing the big picture; we can “miss the forest for the trees.”

It’s extremely important to know history, but the trouble is that the big events in financial history occur only once every few generations. The latest global financial crisis began in 2008 and the one before that in 1929. That’s a gap of 79 years. So, while memory has the potential to restrain action and induce prudence by reminding us of tough periods, over time as memory fades the lessons fade as well.

In the investment environment, memory and the resultant prudence regularly do battle with greed, and greed tends to win out. Prudence is particularly dismissed when risky investments have paid off for a span of years. John Kenneth Galbraith wrote that the outstanding characteristics of financial markets are shortness of memory and ignorance of history.

In hot times, the few who do remember the past are dismissed as relics of the old, lacking the ability to imagine the new. But it invariably turns out that there’s nothing new in terms of investor behavior. Mark Twain said that “history does not repeat itself but it does rhyme,” and what rhymes are the important themes.

The bottom line is that even though knowing financial history is important, requiring people to study it won’t make a big difference, because they’ll ignore its lessons. There’s a very strong tendency for people to believe in things which, if true, would make them rich. Demosthenes said,

“For that a man wishes, he generally believes to be true”

Just like in the movies, where they show a person in a dilemma to have an angel on one side and a devil on the other, in the case of investing, investors have prudence and memory on one shoulder and greed on the other. Most of the time greed wins. As long as human nature is part of the investment environment, which it always will be, we’ll experience bubbles and crashes.

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Hugo Scott-Gall: What things in your skill set have served you well?

Howard Marks: While knowing financial analysis and accounting is essential, almost any smart person can acquire those skills and get a rough idea of the merits of a company. Superior investors are those who understand both fundamentals and markets and have a better sense for what a given set of merits is worth today and what it will be worth in the future. I don’t think I became less able to do financial analysis over time, but I engaged much more in understanding and sensing markets and values: the “big picture”. A lot of my contribution comes from understanding history and investor behavior, from inferring what’s going on around me, and from controlling my emotions.

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Hugo Scott-Gall: Success in our industry often leads to overconfidence. How do good investors avoid that?

Howard Marks: Mark Twain once said,

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

And I totally agree with that. One of the chapters in my book is about the importance of knowing what you don’t know. People who are smart often overestimate what they know, and this tendency can grow, particularly if they are financially successful. And eventually, you get to the master of the universe problem that Tom Wolfe identified in “The Bonfires of the Vanities.”

I believe there’s a lot we don’t know, and it’s important to acknowledge that. I’m sure I know almost nothing about what the future holds, but a lot of people claim to know exactly what’s going to happen. I consider it very dangerous to listen to them. As John Kenneth Galbraith said,

“There are two kinds of forecasters. Those who don’t know, and those who don’t know they don’t know.”

I’m proud to say I’m a member of the first group. Amos Tversky, who was a great behaviorist at Stanford University, said that,

“It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on”.

That is particularly true for investing. I’d much rather have my money run by somebody who acknowledges what he doesn’t know than somebody who’s overconfident. As Henry Kaufman, the noted economist pointed out,

“We have two kinds of people who lose a lot of money; those who know nothing and those who know everything.”

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Hugo Scott-Gall: Have you always been this way, or did you learn to be self-aware and emotionally disciplined?

Howard Marks: I’m inherently unemotional, and I’ve also observed for 45 years that emotions swing in the wrong direction and learned that it’s extremely important to control it. In the market swoon of 1998, I had an employee tell me he was afraid the financial system was going to melt down. I heard him out and then told him to carry on with his work. I don’t compare myself or my colleagues to them, but battlefield heroes aren’t people who are unafraid; they’re people who are afraid and do it anyway. And so we must keep investing; in fact, we should invest even more when it is scary, because that’s when prices are low.

Walter Cronkite once said:

“If you’re not confused you don’t understand what’s going on”.

In the fourth quarter of 2008, I paraphrased that to say, “If you’re not afraid you don’t understand what’s going on.” Those were scary times. But even if you’re afraid, you have to push on. In the depths of the crisis in October ’08 I wrote a memo that I’m particularly proud of, called ‘The Limits to Negativism.’ It touched on the importance of skepticism in an investor. In good times skepticism means recognizing the things that are too good to be true; that’s something everyone knows. But in bad times, it requires sensing when things are too bad to be true. People have a hard time doing that.

The things that terrify other people will probably terrify you too, but to be successful an investor has to be stalwart. After all, most of the time the world doesn’t end, and if you invest when everyone else thinks it will, you’re apt to get some bargains.

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Hugo Scott-Gall: Do you calculate estimates of fair value in advance for the things you want to buy, and do you wait to buy until those are reached in a market downdraft?

Howard Marks: We can try to do analysis in advance, but opportunities often arise unexpectedly. For example, if everyone gets scared due to some sudden bad news about a company, that can give us an opportunity to respond spontaneously and buy its debt cheap. So we can’t plan everything and follow a neat pattern, as a lot of what we do is very opportunistic. We can have estimates of value for some companies, but we can’t know which companies will show up on the troubled list on a given day, or what bonds are going to come up for sale. Most of the inquiries are incoming to us rather than outgoing, meaning we try to buy the things that they want to sell. We have to be generally ready but also be responsive to opportunities to be self-aware and emotionally disciplined?

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Hugo Scott-Gall: How do you think about the current very low interest rate regime?

Howard Marks: Yes. The point is that today you can’t make a decent return safely. Six or seven years back, you could buy three to five-year Treasurys and get a return of 6% or so. So you could have both safety and income. But today, investors have to make a difficult choice: safety or income. If investors want complete safety, they can’t get much income, and if they aim for high income, they can’t completely avoid risk. It’s much more challenging today with rates being suppressed by governments.

This is one of the negative consequences of centrally administered economic decisions. People talk about the wisdom of the free market – of the invisible hand – but there’s no free market in money today. Interest rates are not natural. They are where they are because the governments have set them at that level. Free markets optimize the allocation of resources in the long run, and administered markets distort the allocation of resources. This is not a good thing… although it was absolutely necessary four years ago in order to avoid a complete crash and restart the capital markets.

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Hugo Scott-Gall: If it’s human nature that causes the bubbles and crashes, do you think asset management should be done with more machines and fewer people?

Howard Marks: No, I disagree strenuously. People who doubt the existence of inefficient markets and the ability to profit from them may disagree with me. But if you think you’re operating in an inefficient market like I try to do, a lot can be accomplished by getting great people, developing an effective investment approach, hunting for misvaluations, keeping psychology under control, and understanding where you are in the cycle. I am not saying that everyone should try this. In fact, an algorithm or an index fund may work best for a lot of people. But at Oaktree, we don’t make heavy use of machines. We are fundamentalists and ours is a “non-quant shop.” As long as there are people on the other side making mistakes – failing to fully understand assets, acting emotionally, selling too low and buying too high – we’ll continue to find opportunities to produce superior risk-adjusted returns. This is something I’m very sure of.

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Hugo Scott-Gall: Where would you want to be if you were starting your career as a contrarian today?

Howard Marks: A market being interesting in the long term and being cheap at the moment are two different things. Credit and debt investing is still very, very attractive and interesting to spend time in, even though it may not be especially rife with great bargains today

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The more things change, the more they remain the same.