Term of the Day: Confirmation Bias / Normalcy Bias

Confirmation Bias Definition | Investopedia

A psychological phenomenon that explains why people tend to seek out information that confirms their existing opinions and overlook or ignore information that refutes their beliefs. Confirmation bias occurs when people filter out potentially useful facts and opinions that don’t coincide with their preconceived notions. It affects perceptions and decision making in all aspects of our lives and can cause us to make less-than-optimal choices. Seeking out people and publications with different opinions than our own can help us overcome confirmation bias and make better-informed decisions. http://www.web2pointsomething.org/2011/12/19/feature-article-confirmation-bias-in-the-internet-age/ FEATURE ARTICLE: CONFIRMATION BIAS IN THE INTERNET AGE Posted by: Angeladu | | December 19, 2011 Confirmation Bias refers to “a type of selective thinking whereby one tends to notice and look for what confirms ones beliefs, and to ignore, not look for,  or undervalue the relevance of what contradicts ones’ beliefs. Numerous studies have demonstrated that people generally give an excessive amount of value to confirmatory information, that is, to positive or supportive data”. In fact… “A study done at Ohio State in 2009 showed that participants spent 36 percent more time reading articles that agreed with their point of view than those that challenged their beliefs and many didn’t read any opposing view articles at all”.    In Stephen Mills’s article “The Modern Decline in Independent Thinking“, he discusses how the internet influences individuals’ thinking. In particular, Stephen mentions that groupthink causes the problem of confirmation bias, which eliminates the effectiveness of independent thinking. The internet provides a virtual world that allows individuals to share their opinions regardless of the color, race or creed. That is to say, the internet is supposed to stand for freedom of speech. Nevertheless, if people participate in a networked community, their ability of thinking will be diminished.    Accroding to Stephen, he discovers “groupthink inhibits alternatives, minimizes conflict, and enforces conformity. The need to maintain consistency will push you to continue with the same position once it is articulated”. Is it true that groupthink has such power? Let me give you an example… The reason why the internet appeals to us is because we find ideas that resonate with our own thoughts. Suppose you think social media such as Facebook.com fosters transnational communication. And you find a discussion board online which has an identical point of view. Of course, you will be happy to join the group and continue the discussion. As the group becomes larger, the credibility of the initial topic increases. Imagine a random person who is not sure whether social media can develop worldwide communication or not. But he or she happens to open your webpage. A good chance is that the person makes up his or mind to become one of your followers.  Stephen explains this phenomenon in his article, “information availability means we inevitably will suffer from confirmation bias.  We are not becoming more objective and open minded, we are becoming more committed to our existing beliefs”.    I am not sure this whole idea-following thing is working. In the end, Stephen gives us some suggestions about how to become an independent thinker. Let us hear from him… 1. “You have to get out of all the polarizing debates and groups and away from your fellow devotees and do something that doesn’t feel natural”. 2. “You have to do some hard thinking primarily by yourself; without your standard arguments ready and waiting”. 3. “As long as you understand both the power and danger of groups and act accordingly, you can enjoy the benefits and mitigate the dangers of this new connected world.  The only thing have to gain is your own independent mind”. Here is what I recommend…

			Confirmation Bias Definition | Investopedia A psychological phenomenon that explains why people tend to seek out information that confirms their existing opinions and overlook or ignore informati...
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The Internet is the greatest detractor to serious thinking since the invention of television”.

- Leo Chalupa, Neurobiologist, University of California, Davis

Is the Internet Changing the Way You think? The Net’s Impact on Our Minds andFuture. Edited by John Brokman. (New York: Harper Perennial, 2011).

   Internet has already become an inevitable part of our life. I think the best advantage that we take from the internet is efficiency. The internet saves us a lot of time in finding things. Say a student wants to write an essay about earthquake. She opens Google.com and types in the word earthquake. Less than one second, the internet offers her 167,000,000 results that relate to the earthquake topic. Then, what happens next? Click, click, click… She gets what she wants by simply controlling her mouse instead of spending hours in a library. I believe most of us have the same experience in our life. It is just so convenient that we search whatever we want to know on the internet. However, my question is do you take whatever appears on the internet for granted? or, do you judge the credibility of any arguments made on the internet?

   

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And another one of the big problems that we are facing is something called "normalcy bias".  The following is how Wikipedia defines it...

The normalcy bias, or normality bias, refers to a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster occurring and its possible effects. This often results in situations where people fail to adequately prepare for a disaster, and on a larger scale, the failure of governments to include the populace in its disaster preparations. The assumption that is made in the case of the normalcy bias is that since a disaster never has occurred then it never will occur. It also results in the inability of people to cope with a disaster once it occurs. People with a normalcy bias have difficulties reacting to something they have not experienced before. People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.

THINK MENTAL MODELS

I remember when I was a bigger fan of Warren Buffett and Charlie Munger and read the graduation speech Munger made outlining how students should have a "latticework of mental models" I was so smitten by the brilliance and simplicity of the concept that I kept repeating the words in my head over and over.

You get an PhD. in the game of life if you can learn the concepts and models outlined in this site.

A neat illustrative story at the end demonstrates how these models blend together in how you are talking about playing bridge or playing baseball. Interesting parallels in terms of mind-set.


Think Mental Models website:
http://www.thinkmentalmodels.com/

“The better decision maker has at his/her disposal repertoires of possible actions; checklists of things to think about before he acts; and he has mechanisms in his mind to evoke these, and bring these to his conscious attention when the situations for decision arise.”
(Herbert Simon, Nobel Laureate)

How the exceptional mind works

According to Warren Buffett, his business partner, Charlie Munger has ‘the best 30-second mind in the world. He goes from A to Z in one move. He sees the essence of everything before you even finish the sentence’ (Forbes, January 22, 1996).

How does he do it?

Well, fortunately, Mr. Munger has explained his approach in lectures and books. Essentially, he thinks by using the BIG IDEAS from disciplines as diverse as physics and psychology. He has a list of these ideas (mental models) in his mind and quickly picks the one(s) applicable to the given situation, much as a pilot automatically goes through a checklist prior to take-off.

This website, inspired by the work of Charles Munger, provides over 100 models that can be brought consciously to mind to aid the thinking process.

Each model is described by at least one distinguished user. Examples include Warren Buffett, Richard Feynman, Robert Rubin and Peter Drucker, among others.

Wikipedia defines it as follows:
http://en.wikipedia.org/wiki/Mental_model

A mental model is an explanation of someone's thought process about how something works in the real world. It is a representation of the surrounding world, the relationships between its various parts and a person's intuitive perception about their own acts and their consequences. Our mental models help shape our behaviour and define our approach to solving problems (akin to a personal algorithm) and carrying out tasks.

A mental model is a kind of internal symbol or representation of external reality, hypothesized to play a major role in cognition, reasoning and decision-making. Kenneth Craik suggested in 1943 that the mind constructs "small-scale models" of reality that it uses to anticipate events.

FROM CAPITALISMMAGAZINE.COM:
http://www.capitalismmagazine.com/culture/books-non-fiction/4669-Latticework-Mental-Models.html

Excerpt from Chapter I of "Investing: The Last Liberal Art" by Robert G. Hagstrom

A Latticework of Mental Models

How does one achieve worldly wisdom? To state the matter concisely, it is an
ongoing process of, first, acquiring the significant concepts--the models--from
many areas of knowledge and then, second, learning to recognize patterns of
similarity among them. The first is a matter of educating yourself; the second
is a matter of learning to think and see differently.

He challenged the students to broaden their vision of the market, of finance, and of economics in general; to see them not as separate disciplines but as part of a larger body of knowledge, one that also incorporates psychology, engineering, mathematics, physics, and the humanities.
In this broader view, he suggested, each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding. Those who cultivate this broad view are well on their way to achieving worldly wisdom, that solid mental foundation without which success in the market--or anywhere else--is merely a short-lived fluke.

To drive his point home, Charlie used a memorable metaphor to describe this interlocking structure of ideas: a latticework of models. "You've got to have models in your head," he explained, "and you've got to array your experience-both vicarious and direct-on this latticework of models." So immediate is this visual image that latticework has become something of a shorthand term in the investment world, a quick and easily recognized reference to Munger's approach.

from the book: Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger
http://www.poorcharliesalmanack.com/intro3.html

The quotes, talks, and speeches presented here are rooted in the old-fashioned Midwestern values for which Charlie has become known: lifelong learning, intellectual curiosity, sobriety, avoidance of envy and resentment, reliability, learning from the mistakes of others, perseverance, objectivity, willingness to test one’s own beliefs, and many more. But his advice comes not in the form of stentorian admonishments; instead, Charlie uses humor, inversions (following the directive of the great algebraist, Jacobi, to “Invert, always invert”), and paradox, to provide sage counsel about life’s toughest challenges.

Charlie also employs historical and business case studies to great effect. In these presentations, he makes his points with subtlety and texture, often using a story-like context instead of abstract statements of theory. He regales his audience with humorous anecdotes and poignant tales, rather than with a blizzard of facts and figures. He well knows, and wisely exploits, the traditional role of the storyteller as purveyor of complex and detailed information. As a result, his lessons hang together in a coherent “latticework” of knowledge, available for recall and use when needed.

It is clear throughout these talks and speeches that Charlie places a premium on life decisions over investment decisions. His mental models, drawn from every discipline imaginable, recur repeatedly and, in no way, focus on “business portfolio strategy” or “beta” or “Cap M.” Rather, they center on fundamental truth, human accomplishment, human foibles, and the arduous path to wisdom. Charlie once said, “I wanted to get rich so I could be independent, like Lord John Maynard Keynes.” Independence is the end that wealth serves for Charlie, not the other way around.

HANDLING LOSSES IN AN ENVIRONMENT WHERE WINNING IS IMPORTANT:

"After all is said and done, learning to handle losses will be your greatest triumph." -- Robert Prechter.

More from Prechter:

There are many denials of reality which automatically disqualify millions of people from joining the ranks of successful speculators. For instance, to moan that "pools," "manipulators," "insiders," "they," "the big boys" or "program trading" (known today as "high-frequency trading" -- Ed.) are to blame for one's losses is a common fault.

Anyone who utters such a conviction is doomed before he starts. [My] observation, after eleven years "in the business," is that the biggest obstacle to successful speculation is the failure merely even to recognize and accept the simple fact that losses are part of the game, and that they must be accommodated.

The perfect trading system does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Speculation is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! He even strikes out often. But he still earns six figures a year, because although not perfect, he has approached the best that can be achieved. You don't have to be perfect to win in the markets, either; you "merely" have to be better than almost everybody else, and that's hard enough.

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I read an investment article recently from the Hussman Funds titled "Why Warren Buffet Plays Bridge" and it is especially appropriate to the craft of hitting in baseball in addition to long-term success in investing.

FROM HUSSMAN.NET:
http://www.hussman.net/wmc/wmc061127.htm

The reason relates to the story Buffet's mentor the legendary investor Benjamin Graham tells about the game of bridge. Focus on the process not the results.

"I recall to those of you who are bridge players the emphasis that bridge experts place on playing a hand right rather than on playing it successfully, Because as you know, if you play it right you are going to make money an d if you play it wrong you lose money - in the long run.

There is a beautiful little story about the man who was the weaker bridge player of the husband-and-wife team. It seems he bid a grand slam, and at the end he said very triumphantly to his wife 'I saw you making faces at me all the time, but you notice I not only bid this grand slam but I made it. What can you say about that?' And his wife replied very dourly, 'If you had played it right you would have lost it."

The author rightly observes that it takes restraint to play the game " the right way", with an established "discipline" or approach and let the law of averages work out in your favor. You don't try to win every hand. He describes having the right "temperament" to execute the "approach" and not deviate from it.

The same temperament and approach leads to success in baseball.

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"Anytime you and I question the schemes of the do-gooders, we're denounced as being against their humanitarian goals. They say we're always "against" things — we're never "for" anything. Well, the trouble with our liberal friends is not that they're ignorant; it's just that they know so much that isn't so." - Ronald Reagan