News flash: “US equity futures heads higher in hopes of vaccine progress”
Less than half a day later, I glance up and the same headlines now reads “US equity futures dip over concerns of vaccine efficacy”
Nassim Taleb, author of The Black Swan and Fooled by Randomness wrote,
“Humans have a crippling dislike for the abstract.“
A quick search on google and I came across two contrasting news posted by the same source just 5 days apart!
The truth is that the news we are reading is rarely objective. That does not mean it is irrelevant. But through the information we consume, we generate a mental framework to understand the mechanics of our environment. This in turn shapes our thoughts and decisions.
As good investors, we have to strive to be as objective as possible. A big part of this involves recognizing our biasness when it comes to how and why we consume news.
Let me share some of the lessons that I’ve learnt.
We are always, always, always haunted by confirmation bias
I get asked the same question by my girlfriend every week. It goes along the lines of
“What do you want to eat later? Japanese or Thai Food?”
To which, I will often reply with “I’m fine with anything”
As much as “I’m fine” with either Japanese or Thai food, a little voice inside me is constantly cheering for Japanese food.
As humans, we always have a slight inclination towards a particular view because it is too hard to respond with “I don’t know” to every single important question. Having a view is what makes us unique, and what gives us our identity. Having no view is scary for most of us because it makes us feel like we have no control over the things happening around us.
Thus, we set out to attempt to gather information. Through our experiences, our social circle, and what we read, we construct an explanation of the things happening around us. Naturally, we take the path of least resistance which is to seek out information that confirms our existing beliefs. Assimilating news that is contradictory to our beliefs, and questioning ourselves all the time, is a task that is simply too exhausting for the human brain.
As a result, we start to believe what we want to believe in, read what we want to read, and hear what we want to hear.
We reject news that contradicts our framework simply because it is the easiest thing to do so.
Check out this post by Michael Batnick outlining how there is always a chart that confirms your beliefs.
Here’s the funny thing – we still want to believe that we are impartial and objective human beings. We like to think that we are thinking about things independently all the time. Therefore, we will always be blindsided by our confirmation bias.
While the advent of the internet has democratized access to news, the abundance of news on the internet does not solve confirmation bias. The reality is that we will always seek out what we already agree with, as opposed to accepting what is delivered to us.
This is why it is important to be cognizant of what you choose to read in the news.
The Narrative Fallacy
How many times have we clicked on news articles with the title “3 reasons why ….” or “The reason why Stock XXX is rising today”? Admittedly, I am a victim of succumbing to such headlines as well. As humans, we like stories, we like to summarize, and we crave for that cause-and-effect relationship. Narratives bind facts together, helping us to remember it more easily.
In reality, the world is far too complex, and cannot be explained by a few variables. This is especially true for critical events. Summarizing invariably leads to oversimplification, creating a distorted mental representation of reality.
In addition, correlation does not imply causation. Just because retail sales in the US tend to be higher during cold weather, does not mean that coldness leads to an increase in spending amongst Americans. A more likely explanation is that festive sales tend to coincide with the winter months in the US.
While the truth is that there are no simple explanations, or at times, simply no explanations behind stock movements, the media loves to assign a headline reason for daily stock market gyrations.
Stock market movements are the net result of a multitude of factors. Hedge funds responding to news developments, portfolio managers rebalancing their positions, traders managing their derivatives positions, ETFs experiencing an inflow/outflow of funds, technical chartists exiting / entering new positions, company specific events, and the list goes on…
Indeed, there might be a main event that dominates market movement from time to time, but they do not occur daily. Most of the time, it is the confluence of seemingly related but random event that drives the stock market.
One cannot fault media companies for throwing out such headlines. Unfortunately, we, as readers are to be blamed because who would read a newspaper that reports boring pure statistics and unrelated information without any “logical” arrow of link.
Would you have read my article if I had titled it “Reading news with purpose”?
Maybe yes, maybe no. But the total viewership would definitely be less. I apologize for the clickbait title, but hope you find value in this read.
Nassim Taleb puts this across succinctly in his book, The Black Swan:
“Newspapers try to get impeccable facts, but weave them into a narrative in such a way as to convey the impression of causality (and knowledge). There are fact checkers, not intellect-checkers”
Important things rarely have one cause.
We cannot attribute the COVID-19 pandemic, the September 11 attacks, 2008 Global financial crisis, and Brexit to a single cause. A chain of unrelated events set in motion, resulted in these major events that shaped our world. Likewise, we have to learn to ignore day to day headlines and not be fooled by the randomness that surrounds us.
Now, I am not suggesting that we all become cynics and be skeptical over what we hear or read. In fact, majority of the information and facts presented in the news are highly relevant and we should aim to read as broadly as possible. They empower us to make informed decisions, both in investing and outside of investing. What I’m suggesting is the following:
- Be aware of our heuristics
Understand that it is in our nature to seek out confirmatory news. Understand that we have a tendency to form narratives amongst potentially random occurrences. Understand that important things rarely have one cause. We cannot get rid of our inherent predilection, but we can be less susceptible to them.
- Ask questions, as many as possible
Children in general, ask A LOT of questions because they are trying to piece together information to find out how the world works. As we grow older, we seem to lose that inquisitive nature somewhere along the line (probably out of embarrassment if we asked stupid questions). The key is to always be curious and ask questions. Google will never judge you for asking stupid questions 😊
- Practice inversion thinking
Charlie Munger once said “All I want to know is where I’m going to die, so I’ll never go there.” Watch Charlie Munger himself explain how inversion thinking can be practiced!
Doing the above helps us to be more receptive towards contradictory information and filters out narrative lies, building a robust mental framework. The danger in not understanding how we select, and assimilate information is that it hides risks.
And the biggest risks are often the ones that we don’t see.
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See you around!