Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
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https://www.advisorperspectives.com/art ... ker-player
A quote from the article in Advisor Perspectives:
As Duke points out, once a belief becomes lodged, it becomes very difficult to dislodge. It takes on a life of its own, leading us to notice only evidence that is confirming, and causing us to experience cognitive dissonance. We then work hard to actively discredit contradicting information, a process called motivated reasoning.
Making matters worse is that research shows being “smart” actually makes certain behavioral biases worse: The smarter you are, the better you are at constructing a narrative that supports your held belief.
Duke cites the research of Richard West, Russell Meserve and Keith Stanovich, who tested the blind-spot bias. They found we are much better at recognizing biased reasoning in others but are blind to recognizing it in ourselves.
Surprisingly, at least to me, West, Meserve and Stanovich also found that the better you were with numbers, the worse the bias – the better you are with numbers, the better you are at spinning those numbers to suit your narrative. Quoting Duke: “Our capacity for self-deception knows no boundaries.”
As for me, I'm guilty of testing the extent of those boundaries.
Larry, thank you for writing the article.
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The problem is that it is impossible to tell if your strategy was good or not. We just don't have the data. If a Poker player calculates he wins 86% of the time but in reality, he only wins 75% of the time, his strategy is flawed no matter what the outcome. Same thing in investing. We know in the past that value has outperformed growth. But it is also possible that is incorrect and that on average growth outperforms value and we just happened to have observed a 1:100k event over the past 90 years. Or that given structural changes a market beta of 6 (or 12) is the right number instead of 9 going forward.
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I saw this when it popped up in May and I enjoyed it. My analogy would be a little more intense regarding the poker player emphasizing the uncertainty, but still a good message on bias and risks and staying the course. My analogy might be something to the tune of "poker player determined he had an 86% chance of winning, made a large bet, and then a small asteroid hit the table and obliterated all the money." I am definitely guilty of internal bias in my own decisions over the years.
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A pretty good article by Larry. The analogy of poker compared to investing is flawed. The analogy holds up in one sense that both successful investors and successful gamblers will tilt the odds in their favor as much as possible. Where it breaks down is that investing is not gambling though there are elements of risk to investing. Investing is not a zero sum game, done right, everyone can achieve the return of the markets. With gambling, one wins to the extent that others lose. Everyone can win at investing, you will have winners and losers with gambling. A third point is that the house always wins. If you play the active management game, you may outperform the averages as an individual but collectively the active investors will get market returns minus fees. With indexing, your fees are very minimal and the house's take is very, very small. With active management, the house's take can be pretty large.
A fool and his money are good for business.