“Those who cannot change their minds cannot change anything.” – George Bernard Shaw

We humans love to form social groups. We can’t help ourselves. For much of human history it was necessary for survival. From Lilliana Mason’s new book Uncivil Agreement: How Politics Became Our Identity (via the EconTalk podcast):

Humans are hardwired to cling to social groups. There are a few good reasons for us to do so. First, without a sense of social cohesion we would have had a hard time creating societies and civilizations. Second, and even more basic, humans have a need to categorize. That’s how we understand the world. This includes categorizing people. Third, our social categories don’t simply help us understand our social environment. They also help us understand ourselves and our place in the world. Once we are part of a group, we know how to identify ourselves in relation to the other people in our society. And we drove an emotional connection in a sense of well-being from being group members. These are powerful psychological motivations to form groups.

Here’s the problem. These groups we form are not necessarily built to deal with our modern world in which technology is rapidly changing how we think, act and relate to others. The Internet instead of becoming a great repository of information and wisdom is increasingly becoming a high tech echo chamber. This echo chamber makes it difficult to change people’s minds despite the fact the information is out there. Josh Brown at the Reformed Broker writes:

People can change their minds but it doesn’t happen as a result of one conversation or contentious exchange with a stranger. It’s a process and it isn’t going to involve you. It takes time and experience and changes of scenery and sometimes it never happens at all.

The challenge for investors is to recognize when they have become, or are at-risk of becoming, a part of an investment group. Maybe it is simply impossible not to join a group in some form or fashion. The problem is that unlike philosophies, the financial markets are ever changing. What worked today, may not work tomorrow. An unwillingness to adapt has been the downfall of many great investors. As Ben Carlson at A Wealth of Common Sense writes:

Ideas, strategies, rules, and philosophies which were once considered iron law can become overcrowded and get arbitraged away. And once knowledge becomes widely disseminated, markets and investors adapt, which can change performance going forward.

For millenia, people have viewed gold as a store of value. For decades, investors have viewed gold as a hedge against inflation or political risk. The group that has coalesced around the idea that gold is a superior investment, i.e. goldbugs, is convinced of their viewpoint. The problem is that gold has no inherent value. It’s value is solely predicated on what humans say it is worth. Michael Batnick at the Irrelevant Investor writes:

Like with stocks, trying to figure out where gold is going is a fool’s errand. Unlike stocks however, gold has no fundamentals. There are no earnings, dividends, cash flow, nothing. The fact that it moves on god knows what is precisely what makes it a very effective diversifier.

One of the enduring challenges we face as investors is our lack of data. On the face of it, that seems absurd. If anything, we seem to be awash in data. The thing is that we only have historical record to look back on. If we re-ran history maybe frankincense or myrrh would be the as highly valued as gold is today.

Transforming data into knowledge isn’t easy. The social sciences are only now coming to terms with studies whose conclusions are not reproducible by other researchers. This doesn’t mean something nefarious is going, it simply means that doing science is difficult. Researchers rarely have as much data as they would like. We are all operating under some assumption, that will be overturned in the future. It shouldn’t be surprising that anecdotes are such powerful things. Shane Parrish at Farnam Street writes:

(G)eneralization is a widespread human bias, which means a lot of our understanding of the world actually is based on extrapolations made from relatively small sample sizes. Consequently, our individual behavior is shaped by potentially incomplete or inadequate facts that we use to make the decisions that are meant to lead us to success.

“Success” is a pretty high standard. Simply keeping up with our rapidly changing world is hard enough. You can either embrace change and try, as hard as it might be, to let whatever data we might have guide your thinking, or you can cling to social groups whose pull is largely emotional, not rational. One thing we do know is that the future isn’t going to look like the past. The problem is we don’t know exactly in what ways. So be nimble and choose your “group” carefully.