In 2018, former New York mayor Rudolph Giuliani, serving as President Trump’s attorney, made headlines when he commented that President Trump should not have to submit to an interview by special counsel Robert Mueller as part of the Russia investigation. “Truth isn’t truth,” Giuliani said in an interview with NBC’s Meet the Press, causing host Chuck Todd to react with incredulity. The controversial quote went on to lead a Yale Law School librarian’s list of the most notable quotes of the year.
Q1 2020 hedge fund letters, conferences and more
Despite what you may think of Giuliani or his comment, his assertion that people have different versions of the truth holds some merit. Confirmation bias, defined as the tendency to seek information that reinforces a person’s pre-existing beliefs, suggests that people may not always be objective, or think critically, before accepting information as fact.
Let’s take an example from recent coverage of President Trump’s rally in Tulsa, Oklahoma. What is “true” about the reason why attendance at the event seemed lower than anticipated? Was it that protesters blocked the entrances and warnings by the media of exposure to COVID-19 kept people away? Was it because TikTok users and K-pop fans successfully mounted a campaign to horde tickets to the event? Or was it because the Tulsa Fire Department miscounted the attendees, giving the impression that rally-goers filled less than a third of the BOK Center’s capacity, while campaign officials recorded roughly double the number of people who passed through its metal detectors? In this situation, your “truth” may depend on the sources of information you trust. Conservatives may favor reporting by Fox News or Breitbart, while liberals may believe outlets like CNN or the New York Times.
But maybe you don’t trust media reports of any kind. Studies suggest that constant challenges to the validity of traditional news outlets has denigrated its authority, creating opportunities for non-journalistic outlets to take their place and encourage the spread ideologically extreme, false or misleading content through social media. When social media users choose to filter what they see in their feed based on their values and beliefs, the potential for confirmation bias increases.
Is it really "fake news?"
For the past three years, a company called MindEdge has studied digital literacy among college-educated Americans. It found that while college-educated Americans are confident in their critical-thinking skills, most were unable to pass a nine-question quiz designed to gauge their ability to snuff out fake news. Interestingly, it found that Millennials had a higher failure rate than Baby Boomers, although the majority of Baby Boomers also failed the quiz.
In terms of trust, the study found no consensus about whether traditional, or “mainstream” media were more or less reliable than online content. A majority of younger respondents (63 percent) said they think a story is more accurate if it has gone viral. That’s in contrast to just over half of Baby Boomers (50.4 percent) who thought a viral story was probably less accurate.
The study’s organizer identifies low levels of digital literacy, and the inability to identify fake news or inaccurate information, as a significant problem that affects the accuracy of our collective knowledge. I’ll go one step further and suggest it can affect your wealth, too.
Confirmation Bias and Your Investments
Last year, financial advisers identified confirmation bias as the third most significant behavioral bias affecting their clients’ investment decisions. It’s something I’ve also seen in my practice. In one example, I’ve seen employer-loyal clients who loaded up on company stock and were reluctant to sell, believing their company was in good financial health with excellent prospects for the future. The problem with this scenario was two-fold: If the company fell on hard times, the employees not only suffered from a decline in their stock; they also could potentially lose their jobs!
Some people choose stocks based on their own positive experience with a company’s product or services and seek to validate their decision to invest by citing articles, statistics or other information that support what they believe. While investments like these may be fine in limited amounts, those who go “all in” place themselves at a higher risk for losses, either because they aren’t diversified enough, or because they’ve shielded themselves from information that might go against their perceptions.
It works the opposite way, too. Someone may hear a negative story about a company and demonstrate their anger by selling their holdings in a boycott. If the story is rumor and isn’t true, the rash action to sell the stock may cause the investor to lose money.
Battling Confirmation Bias
How can you keep confirmation bias from creeping into your investment strategy? Here are a few ideas to employ to ensure you’re keeping an open mind:
• Gather the universe. When doing due diligence on any type of investment, don’t limit yourself to articles that support your views. Challenge yourself to find at least three media sources, investment perspectives, and arguments that differ from your own. Consider why these points of view could make sense and dig deeper to seek proof or justification. Try arguing against your point of view. What information would help you win?
• Apply the rule of three. In 1999, the Journal of Accounting Research published a study that showed auditors who developed three hypotheses were more likely to identify misstatements correctly when performing analytical procedures than auditors who developed just one hypothesis. If you see a performance change in an investment you own, see if you can identify three potential causes to explain the change.
• Use the “Six Thinking Hats.” A tool pioneered by Dr. Edward de Bono, the Six Thinking Hats helps you rotate through several thinking styles to view a topic from multiple angles. These color-coded hats represent factual information, intuition, skepticism, optimism, creative alternatives, and clarification. Although frequently performed by teams in a business setting, you can try it on your own or with your partner.
Although financial advisers can also be subject to confirmation bias (we’re only human, after all!), a conversation with your adviser can be a great place to start when evaluating your investments. In determining your “truth,” a wide range of perspectives may lead you to a conclusion you hadn’t considered.
