Regardless of your political beliefs, Donald Trump’s presidential victory on Tuesday night was definitely a shocker.
But as Barry Ritholtz over at The Big Picture notes, “One of the best things to do when confronted by a major surprise is to see what there is to be learned from the experience.” After all, you can always learn a lot about how investing works from non-market events.
In the past, Ritholz says he’s found investing wisdom in March Madness, the 2012 elections, Super Bowls and $8 million janitors.
Read on below for 8 things that YOU can learn about investing from Tuesday night’s presidential election results:
1. Forecasters are Terrible
As Warren Buffett says, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
2. Confirmation Bias
Confirmation bias is the tendency to search for, interpret, or recall information in a way that confirms one’s beliefs or hypotheses. People display this bias when they gather or remember information selectively, or when they interpret it in a biased way. The effect is stronger for emotionally charged issues and for deeply entrenched beliefs. People also tend to interpret ambiguous evidence as supporting their existing position.
3. Models are Not Perfect
Imagine that an archer is firing an arrow at a round target 30 yards away. If he hits the same spot every time after 10 shots, then he is very precise. But if that spot is 12 inches to the left of the bullseye, then he is very inaccurate. Remember that models are precisely inaccurate. They give very exact, definite answers… But that doesn’t mean they’re the right answers all the time.
4. Optimism Bias
This could also be called illusory superiority, and it’s related to #8’s Dunning-Kruger Effect.
5. Random Factors & Luck
Random factors are so important. That’s why people say it sometimes pays to be lucky rather than good, and why it’s flat out impossible to successfully time the market.
6. Hindsight Bias
Hindsight bias is the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it.
BTW, Ritholz notes that we should say “I don’t know” more often. That’s a very interesting (and very true in my opinion) point. In Sapiens: A Brief History of Humankind, Yuval Noah Harari makes the case that scientific progress – and therefore the modern world – only started when people began saying “I don’t know.”
7. The Narrative
The narrative fallacy and hindsight bias – especially as they apply to this election – remind me of Nassim Taleb’s description of black swan events. Black swan events have three properties: (1) the event is rare, (2) it has an extreme impact, and (3) it is inappropriately rationalized and categorized as predictable after the fact. Sound familiar?
8. Nobody Knows Anything
This could also be called the Dunning-Kruger Effect, wherein unskilled individuals suffer from illusory superiority, mistakenly assessing their ability to be much higher than is accurate.
What were YOU’RE investing takeaways from Trump’s win? Let us know in the comments section!
Thinking, Fast and Slow
by Daniel Kahneman
Major New York Times bestseller, Winner of the National Academy of Sciences Best Book Award in 2012, Selected by the New York Times Book Review as one of the best books of 2011, A Globe and Mail Best Books of the Year 2011 Title
One of The Economist’s 2011 Books of the Year, One of The Wall Street Journal’s Best Nonfiction Books of the Year 2011, 2013 Presidential Medal of Freedom Recipient, etc.
The Black Swan: The Impact of the Highly Improbable
by Nassim Nicholas Taleb
The Black Swan is a standalone book in Nassim Nicholas Taleb’s landmark Incerto series, an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision-making in a world we don’t understand. The other books in the series are Fooled by Randomness, Antifragile, and The Bed of Procrustes.
Sapiens: A Brief History of Humankind
by Yuval Noah Harari
From a renowned historian comes a groundbreaking narrative of humanity’s creation and evolution—a #1 international bestseller—that explores the ways in which biology and history have defined us and enhanced our understanding of what it means to be “human.” New York Times Bestseller and a recommended read from President Barack Obama, Bill Gates, and Mark Zuckerberg.
