Wanna Bet - The path to making better decisions
The market rise has made many investors feel smart while making others wonder how they got it wrong. With success comes confidence and with failure perhaps some self doubt. Regardless of which side of the emotional scale you are on we need to realize that we operate in a world where we can’t predict the future and are forced to make decisions with incomplete information. Just because you were successful doesn’t mean you made the best decision at the time. We are hard wired to be biased towards our own narrative but one simple question, “Wanna bet” can force us to consider alternative views and may just make us better investors.
Despite the confidence of many forecasters the world is rarely black and white and your decisions are never 100% right or 100% wrong. If you ever watch poker on tv you will have noticed win percentages associated with each players hand. As more cards are laid down the players odds increase or decrease as the future becomes more certain. At the time of the first bet a player could have a 20% chance of winning but as more cards are laid down it could easily increase to 80% or 90%. Even at 90% the last card could spell ruin and the player could loose. Over months and years opinions and the fortunes of companies and their stock or bonds can change dramatically. At the start of January 2020 Tesla was the most shorted stock in the US with a short interest larger than Apple which at the time was 14 times Tesla’s market cap. Six months later Tesla had quadrupled in value. Despite valid reasons to be short Tesla, things changed in favour of those with a long position. Things could have turned out differently due to a leap in a competing technology, less customer demand, any multiple of things. Neither the shorts or the longs knew with anywhere close to 100% accuracy what would happen even over that short time period. Imagine the uncertainty with businesses who’s stories take longer to develop (note: Tesla turned 17 on July 1st, 2020). Making wholesale buys and sells of positions or changes to your asset allocation is ill advised but adjusting your portfolio over time based on new information makes sense.
Investors need to have an opinion but it's critical to be open to diverse viewpoints in forming your opinion. We have all been in situations where someone has avoided any idea that does not support their own view. We can disregard these types of people as being less astute but be careful of your own confidence. Studies have shown that the smarter a person is the better they are at rationalizing and framing data in support of their narrative even if the data is false. We reinforce our ideas through the information we accept into our environment and the people we seek out to connect with. Most people watch CNN or Fox not both. Forcing ourselves to explore both perspectives is productive. The market is not a vacuum, it is a melting pot of people, ideas and strategies. Going all in with a very strong hand could appear to be a good idea but understand you have limited or no ideas of what cards others are holding in poker and especially in life.
How can we solve the problems of biases and force ourselves to make better decisions. Thinking can be categorized into two groups according to psychologist Gary Marcus, the reflexive and deliberative mind. Daniel Kahneman termed it fast and slow thinking. The reflexive system does things automatically without our conscious awareness and is the larger part fo the brain. The deliberative brain is smaller but considers facts, thinks them over, deliberates. Biases are often a result of our fast thinking and can be established without fact checking, eg. one human year does not equal 7 dog years. If someone asked you to bet on your certainty around dog years it would immediate activate your slow brain which would ask, how do I know what I think, where did the information come from, what is the quality of my sources, what does the other person know, what is their level of expertise, what is my experience and knowledge of the other persons approach? Is there something I am missing. The simple question of “Do you want to bet” can change the chemistry of our decision making especially when the stakes increase.
It takes time to be curious and it can be a waste of time if you don’t end up changing your strategy. The benefit is the learning achieved though the process of exploring alternative ideas. If you had a recent investment surprise that was outside of what you thought was possible when you first made the investment it may be worth reconsidering your analysis rather than digging in your heals. Find those with opposing views that you trust to deliver good information and be curious. Wisdom is most effectively gained through experience, leveraging others that have different experiences or strategies that we have yet to have explored. Investments are educated bets that can and should be adjusted as new information is revealed.