During your college days you might be lucky enough to come across an idea that is worth the price of admission. This happened to me during my international relations class taught by professor William Stover
In one of his classes, he asked us a simple question, “Why did the US invade Iraq?” Each student had valid reasons why the US invaded Iraq. Such as Oil, Military Industrial Complex, heighten political fear since 9/11, terrorism, support for Israel, the risk of Saddam getting a nuke, etc.
Each student argued to death why their single reason was the primary driver for the invasion and they had plenty of evidence to back up their claims. Eventually, Stover drew a circle on the whiteboard and said, “After the fact it’s easy to see why we invaded because there are no more moving pieces, no more uncertainty, things are static, so you can drain the complexity out of the situation to create a simple narrative. But when we simplify the situation, we forget all of the factors at play that lead us to war.”
He then filled the circle with a litany of reasons why we invaded, and soon it became evident that our own biases prevented us from seeing the other factors at play that lead to the Iraq war.
We don’t intentionally do this because we want to make bad decisions. Our brains create narratives to make the world manageable. For example, if the next time you made a decision you had to take in all possible data points, analyze them, and try to come up with a objectively verifiable solid decision. Nothing would ever get done in your life.
We have to limit the data we upload into our brains in order to function in this world. We need to create narratives so our world becomes more manageable and stable. It’s when these narratives turn out to be incorrect when our lives and the markets get thrown into chaos.
But in order for us to make better investing decisions, we have to do the reverse. We have to challenge our assumptions by seeking data or people we disagree with in order to test the validity of our narratives. It’s a hard exercise because most people don’t do this, but if you have the ability to stop, think, and challenge your narratives, your investing decisions will be based on a firmer foundation.
However, the problem with that is, when do you stop taking in data? How do you know if the data is credible? And how do you decide to weigh certain opinions over others?
Who knows. I guess that’s where risk comes into play when we make investments.
PS - A few weeks ago I had a conversation with Annie Duke
about decision making and other cognitive traps that can hurt our lives, check it out!