One topic we want to write more about is behavioral finance. It has been for nearly a decade the most dynamic area of financial research. We often find it very useful to examine examples of errors in related fields. This often better elucidates the issue at hand than one that is hits closer to home.
Michael Shermer at Scientific American summarizes a research piece on the confirmation bias. This time the research takes place in the realm of politics. Shermer observes that in politics the two sides of the political debate are notable for the absolute rigidity of their beliefs.
This surety is called the confirmation bias, whereby we seek and find confirmatory evidence in support of already existing beliefs and ignore or reinterpret disconfirmatory evidence. Now a functional magnetic resonance imaging (fMRI) study shows where in the brain the confirmation bias arises and how it is unconscious and driven by emotions. Psychologist Drew Westen led the study, conducted at Emory University, and the team presented the results at the 2006 annual conference of the Society for Personality and Social Psychology.
Shermer notes that in many fields it is essential that decision makers face the facts that may disprove their long standing beliefs. Systematically creating this contrast can only help us. As Shermer concludes,
Skepticism is the antidote for the confirmation bias.
We believe the application of this advice is essential for investors and traders alike. One of the great things about the blogosophere is that there are a wide variety of opinions and methods out there that can be used to test our own biases and positions.
Continuing briefly on the political front, Will Wilkinson at Cato @ Liberty also weighs in on the Shermer article with a “Declaration of Cognitive Independence.” Wilkinson thinks we all could make use of some conflicting ideas.
So, this Independence Day, why not pick up a political book you know you’ll disagree with. Or write a short essay giving the best argument you can think of for a position you find abhorrent. Or really listen to what your annoying brother-in-law thinks about the war at the family picnic. We could all be a little more rational, and a little more free, if only we really wanted to be. Dogmatic, whole-hearted commitment does feel good. But there is more to life than feeling good. There is truth, for one thing. And there is freedom—self-command. We’re all jerked around by our own minds. But we can be jerked around less.
Another area in which Will Wilkinson is active is the area of “happiness research.” At his own blog he summarizes some recent research that shows that income has a surprisingly small effect on moment to moment happiness. There are a number of implications from this research, but we doubt that these findings will dissuade the majority of active investors from their trading plans.