Why American Idol Contestants and Portfolio Managers Suffer from the Same Thinking Errors
In the last two years of "American Idol," we have seen Adam Lambert and David Archuleta, both incredibly talented singers who likely had spent hundreds of hours honing their craft, fail to win the competition. So why is it that people like Dexter Ward and Dave Pittman, who auditioned during the January 27th episode and have no where near as much talent as Lambert and Archuleta, believe they can win?
Like most people, Ward and Pittman - neither of whom made it past the judges to the next round - suffer from confirmation bias. Confirmation bias occurs when we systematically ignore facts that don't match our beliefs, and we consider only those things that are consistent with what we want to believe. Unfortunately, Ward and Pittman, like many of the contestants who never made it to the next level, may have listened to the high praise coming from their friends or family members without considering the level of training and talent it would actually take to win "Idol."
Many traditional portfolio managers are no different from these two fellas when it comes to confirmation bias. A few years ago, a fund manager told me how well he was doing for his clients. "To what do you attribute your success?" I asked.
"I'm smart and I work hard," he said.
"If most portfolio managers were stupid and lazy, then that's all you would need to do to be successful," I pointed out. "But since they're almost all wickedly smart and work hard, how is it that you can outperform them by doing the same thing as they do?"
He never got it. It was confirmation bias. He confused a bull market with what he thought was his own fantastically flawless decision-making. To beat the markets, you really need to have consistently superior information (almost impossible to get legally) or a superior process by which to make investing decisions. This is where naked strategies come in; naked strategies are THE superior way to make decisions because the method's rules - transparent to anyone - set judgement aside and keep you on track.
Incidentally, I devote two chapters to confirmation bias in The Naked Portfolio Manager. The best way to avoid confirmation bias is to try to disprove your theory, which I actually attempted to do to my own naked strategies theory in chapter eight.
Like most people, Ward and Pittman - neither of whom made it past the judges to the next round - suffer from confirmation bias. Confirmation bias occurs when we systematically ignore facts that don't match our beliefs, and we consider only those things that are consistent with what we want to believe. Unfortunately, Ward and Pittman, like many of the contestants who never made it to the next level, may have listened to the high praise coming from their friends or family members without considering the level of training and talent it would actually take to win "Idol."
Many traditional portfolio managers are no different from these two fellas when it comes to confirmation bias. A few years ago, a fund manager told me how well he was doing for his clients. "To what do you attribute your success?" I asked.
"I'm smart and I work hard," he said.
"If most portfolio managers were stupid and lazy, then that's all you would need to do to be successful," I pointed out. "But since they're almost all wickedly smart and work hard, how is it that you can outperform them by doing the same thing as they do?"
He never got it. It was confirmation bias. He confused a bull market with what he thought was his own fantastically flawless decision-making. To beat the markets, you really need to have consistently superior information (almost impossible to get legally) or a superior process by which to make investing decisions. This is where naked strategies come in; naked strategies are THE superior way to make decisions because the method's rules - transparent to anyone - set judgement aside and keep you on track.
Incidentally, I devote two chapters to confirmation bias in The Naked Portfolio Manager. The best way to avoid confirmation bias is to try to disprove your theory, which I actually attempted to do to my own naked strategies theory in chapter eight.
1 Comments:
More proof that you need to remove emotion from just about any decision in life to gain better perspective
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