Frank K. Martin, CFA

‘Tell Me What I Wanna Hear’

Paraphrasing a refreshingly perceptive Ben Sasse, first-term senator from Nebraska: Those of us in the investment management profession know people who appear to sincerely want our advice, but then resist when we tell them something they don’t want to hear. In all candor, I must admit to being on the receiving end as well. I have rejected sound advice from time to time, and I suspect you have too.[i] Such is the result of bias. 

Confirmation bias and its corollary, motivated reasoning, discussed below, originates not from weaker minds but from something simpler. It is our innate desire to make sense of the world and, toward that end, to build on ideas and concepts we think we understand. In fact, such bias has its analog in scientific research. Thomas Kuhn describes “normal science” as a process predicated on the assumption that scientists know what the world is like at the macro level. They are constantly searching for new data to support the prevailing thesis. When they come across anomalies that don’t fit their tidy existing model, they tend to ignore them.[ii]

The Inevitability Of Bias

To be sure, those who go against the inertia of conventional thought are frequently rebuffed in their attempts to articulate their insights. They are frequently called Cassandras, often with just cause. “Motivated reasoning,” describes our tendency to embrace what we want to be true much more easily than we accept apparent new “facts” about which we are not so certain. If, in reading this post, you tend to share my worldview, your reading may be thorough. If you disagree, you’ll likely skim the post in search of a sentence or paragraph that will justify moving on to something else. Make no mistake: In such endeavors, I’m anything but guilt-free.

Confirmation biases become most consequential when they stem from ingrained, ideological, or emotionally charged views. In applying historically informed and rigorous valuation metrics to securities, value investors seek to circumvent the bias trap by using long established normative models that operate beyond the zeitgeist of the times. Unfortunately, an absolute-return value approach is itself still an ideology. Having evolved over decades of experience, it is certainly deeply ingrained. In seeking to be “inversely emotional” (feeling better as prices fall below intrinsic value and worse as they rise well above), we attempt to allow our rational mind to hold the high ground. Attempt is the operative word.

Parsing Desires

We can get tripped up, though, by conflating the desire to be right and the desire to have been right. The first is laudable—the practical and theoretical thirst for truth. While we strive to focus on the facts, there are simply too many arenas in which judgments based on uncertainty are unavoidable; i.e., Federal Reserve policy. Smart people differ on whether, and to what extent, there will be consequences for nearly a decade of hyper-accommodative Fed policy.

“Pride goeth before a fall” might accurately characterize the desire to have been right.[1] Haughty with overconfidence, it’s easy for us to be blinded to ways in which we might be wrong and thus find ourselves blocked in our journey toward the truth. Because of, say, the digital revolution, is absolute return value investing out of touch with a new paradigm? In the past we’ve written that progress in science is cumulative, but in finance it’s repetitiously cyclical, with old ideas simply recycled in new arraignments. Could it be that this time really is different?

The hurdles to enlightenment don’t stop there. Even the highly intelligent can be conflicted by their conviction regarding the power of their own knowledge. As Leo Tolstoy wrote, “The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.” There are those among us, who by virtue of years of careful study and reflection, possess superior knowledge to the layman. But if we follow the pathway of normal science … are we wiser or simply more knowledgeable?

The Expert On Bias And Expertise

Philip Tetlock, PhD, enjoys the paradoxical distinction of being the leading expert on expert failure. After a 20-year study of the accuracy of thousands of forecasts from hundreds of academics, analysts, and pundits, the academic by-product, Expert Political Judgment (2005), found the average expert’s opinion to be little better than a random guess.

Tetlock downplays an expert’s education or experience but is keenly interested in how he thinks. He quotes the famous line that philosopher Isaiah Berlin borrowed from a Greek poet: “The fox knows many things, but the hedgehog knows one big thing.” According to Tetlock, better forecasters are like foxes: self-critical, eclectic thinkers who are willing to update their beliefs when faced with contrary evidence, are doubtful of grand schemes and are rather modest about their predictive ability. Contrariwise, “the less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. Understandably, the media love hedgehogs.”

Tetlock contends that most individuals are motivated to think critically only when held accountable by others. If we’re expected to justify our beliefs, feelings, and behaviors, we’re less likely to be biased toward confirmatory evidence. This stems less from a desire to be accurate than wanting to avoid negative consequences or derision for being illogical.

Doomster hedgehogs Robert Rodriguez and Jeremy Grantham, Tetlock acknowledges, were among the first and few to see the Great Financial Crisis (GFC) coming.[iii] At the same time, he argues that they can be “way, way out front.” Moreover, he says they often overshoot, remaining bearish far too long. Tetlock concludes, “That’s how it is with hedgehogs: you get spectacular hits but lots of false alarms.”

On Hedgehogs And Black Swans

We, like Tetlock, have high regard for Nassim Taleb, who argues that events like the GFC are not like “drawing a card in poker where you are sampling from a well-defined universe, and you have repeated play, and you have clear feedback.” Black Swan events (based on a book of the same name) are what really matter in history. The things we can readily predict are invariably trivial by comparison.

From past posts, it is clear we value preparedness over prediction. We are not forecasters. Preparedness is certainly less time-dependent than prediction, but preparation for a Black Swan event is not without consequences. It runs headlong into career risk. Paraphrasing economist legend John Maynard Keynes, the duration of the market’s bout of irrationality—if that in fact has been the case of the last few years—may exceed the tolerance of clients to endure lagging performance.

I’ve been writing and publishing on economics and the capital markets since the fall of 1971, in part to record history in real time. I’ve felt privileged to have had a ringside seat at a socioeconomic arena like none other in modern history. Then a 29-year-old, I committed to write indelibly what I observed for posterity’s sake. Practically, by leaving a paper trail, a mechanism was in place by which to hold myself accountable—by rereading what was originally written months or years earlier. Relatively new to blogging, I’ve found a new venue for not only expressing my views but providing readers with the opportunity for immediate feedback. I particularly appreciate those who bring to my attention any biases they see percolating up through my posts. Since it is the truth that I am honestly seeking, you could do me no greater favor than to point out where, in your opinion, I’ve gone off the rails. Please don’t hold back.


[1] “Pride goeth before destruction, and a haughty spirit before a fall” (Proverbs 16:18).


[i] Ben Sasse, Them: Why We Hate Each Other—and How to Heal (St. Martin’s Press, 2018). Kindle Edition: 85-87.

[ii] Thomas Kuhn, The Structure of Scientific Revolutions (University of Chicago Press, 1962).

[iii] The reader of A Decade of Delusions should have ample evidence on whether the undersigned was among those who not only foresaw the danger but managed portfolios to be on the right side of a Black Swan event.