I read an interesting tidbit this week from Michael Mauboussin’s latest missive on thirty years in the investment business. It’s the story of some curious psychological research from the 1970s.
Amos Tversky (long time collaborator with decision-making expert Daniel Kahneman), asked a group of subjects which pair of countries they thought to be more similar: West Germany and East Germany, or Nepal and Sri Lanka. Two-thirds of the subjects replied West Germany and East Germany were more similar.
Tversky then inverted the question, asking which pair of countries was more different. Strangely, this time around 70% replied West Germany and East Germany more different. Logically, the answer to this second question should simply be the opposite of the first question, but something else was going on...
Tversky was among the first to document the effects of priming. He found that asking the same question in different ways lead people to choose different answers. In effect, he proved “seek and ye shall find” to be true.
This priming effect is so deep in our decision making that it is nearly hidden from our in-the-moment cognition. This and other studies show that our minds are powerful enough to convince us that anything can be true, so long as we believe it.
So if you’re in the camp that markets are destined to crash, you will find and interpret a multitude of observations to support your cause. Or if you think we’re on the cusp of the next bull market, you’ll find plenty to support that too. Or maybe your field is US politics, and you believe that either Trump/Clinton are going to make/break the nation. The point is that if you start with a conclusion and work backwards to find the evidence, your mind will figure out a way to be right every time. The trick is that while these wheels are in motion, it takes deliberate practice to stop yourself from working backwards.
All of this makes “process over outcome” the most important mantra of investing. A repeatable evidence-based investment process is the only way to break out of the priming game. Or maybe that’s just what I choose to believe.