Motivated Reasoning

By Robert Seawright, Proprietor, Above the Market

There is a wide body of research on what has come to be known as “motivated reasoning” and – more recognizably for those of us in the investment world – its “flip-side,”confirmation bias.  While confirmation bias is our tendency to notice and accept that which fits within our preconceived notions and beliefs, motivated reasoning is the complementary tendency to scrutinize ideas more critically when we disagree with them than when we agree.  We are also much more likely to recall supporting rather than opposing evidence.  The Simmelweis Reflex is a reflection of this phenomenon. Upton Sinclair offered perhaps its most popular expression:  “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

The classic study in this regard concerned smoking and cancer.  If you are old enough, you may recall that in 1964 the U.S. Surgeon General famously issued a report linking smoking and cancer.  It was a very big deal at the time and was extremely controversial.  Shortly thereafter, two scientists interviewed smokers and nonsmokers alike and asked them to evaluate the Surgeon General’s conclusions. Nonsmokers generally agreed with the Surgeon General.  Smokers, however, who clearly had something significant to them at stake, were not nearly so sanguine.  In fact, they concocted a variety of dubious challenges, including “many smokers live a long time” (anecdotal evidence to the contrary does not undermine the impact of the data in total) and “lots of things are hazardous” (So?). Bringing true believers together in a group tends to compound the problem and ratchet up the denialism.

One study by the late Ziva Kunda should really ring true to those who pay attention to our polarized political sphere. A group of subjects were brought into a lab and told that they will be playing a trivia game.  Before they play, they get to watch someone else (the “Winner”) play, to get the hang of the game.  Half the subjects are told that the Winner will be on their team and half are told that the Winner will be on the opposing team.  The game they watch is rigged and the Winner proceeds to answer every question correctly.  When asked about the Winner’s success, those who expect to play with the Winner are extremely impressed while those who expect to play against the Winner are dismissive.  They attribute the good performance to luck rather than skill (self-serving bias, anyone?). Thus the exact same event receives diametrically opposed interpretations depending upon whose side you’re on. Sounds like post-political debate spin, doesn’t it?

This problem also explains why it can be so hard for us to find, admit and respond to our mistakes — why we hang on to bad trades so long and even refuse to see them as bad (evidence be damned).  As Tadas Viskanta frequently points out, investing is hard.  We will make frequent errors. And when we have something significant at stake — money, ego, family, etc. — it’s really hard to see errors, even if (when!) our positions are pretty nutty.

Some general conclusions and extrapolations should be pretty obvious and plenty familiar.  We choose ideology over facts, especially when it is in our interest to do so.  We all develop overarching ideologies as intellectual strategies for categorizing and navigating the world. Psychological research increasingly shows that these ideologies reflect our unconscious goals and motivations rather than anything like independent and unbiased thinking. This reality fits conveniently together with our tendency to prefer stories to dataand our susceptibility to the narrative fallacy, our tendency to look backward and construct a story that explains what happened along with what caused it to happen, more consistent with what we already think and expect than with the facts, especially when the story supports our overall interests.

We all like to think that our outlooks and decision-making are rationally based processes — that we examine the evidence and only after careful evaluation come to reasoned conclusions as to what the evidence suggests or shows. But we don’t. Rather, we spend our time searching for that which we can exploit to support our pre-conceived commitments, which act as pre-packaged means of interpreting the world.  We like to think we’re judges of a sort, carefully weighing the alternatives and possibilities before reaching a just and true verdict.  Instead, we’re much more like lawyers, looking for anything – true or not – that we think might help to make our case and looking for ways to suppress that which hurts it.

We inherently prefer words to numbers and narrative to data — often to the immensedetriment of our understanding.  Indeed, we know from neurobiology that when presented with evidence that our worldviews are patently false, we tend to refuse to engage our prefrontal cortex, the very part of the brain we need most to make sense of the new.  This aspect of our make-up is potentially damaging to every decision we make, and especially in investing.  It’s why we concoct silly conspiracy theories. We see what we want to seeand act accordingly.  And if it’s in our interest to see things a certain way, we almost surely will.

As always, then, information is cheap while meaning is expensive.

Robert Seawright

Robert Seawright

Robert P. Seawright is the Chief Investment & Information Officer for Madison Avenue Securities, a broker-dealer and investment advisory firm headquartered in San Diego, California. Its focus is the capital markets and personal finance from a data-driven perspective.

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Comments

  1. I was crushed by a leveraged Vix trade through an ETF from December 2011 through March 2012. I was “certain” that markets were going to see a spike in volatility due to the weakening Eurozone situation, despite all the central bank intervention (mistake 1) and dollar cost averaged down my position. Even though my economic thesis was right, the trade just wouldn’t make money, but I stuck with it anyway and only read articles that supported the thesis that volatility was just around the corner.

    Only after learning of the horrible monthly roll contango losses embedded in these ETFs did I finally decide to dump the trade and save myself from a series of further disappointment. Hoping this experience will save me from making bigger, more colossal mistakes in the future.

  2. A good article. There is an interesting piece about the R&R controversy at Market Watch that is worth reading in the same vein. As Cullen has noted, the R&R paper is of limited value because it compares apples with oranges. This piece makes that in another way, one that I have made elsewhere. It’s a pretty limited data set. If you get the data, you see that the distributions are very wide, poorly defined (because the data set is too small), and non-gaussian. So even if you were comparing apples to apples, taking the mean for different bins of debt/gdp isn’t robust statistically.

    Given the inherent complexity of human interactions it seems simple minded to adopt a strong polarized ideology in the realm of economics. Looking at the data with an open mind is vital. Take the R&R data (or the revised set from the recent UMass paper). There is high growth in some of the >90% data, and negative growth in it as well. The highest growth in the data set is for moderate debt, but the fewest negative growth episodes are in the very low debt bin. So for most cases you can make ideologically about debt/gdp there are counter examples in the data. Thus, when I look at the raw data, my conclusion is that debt/gdp is not a primary independent variable for growth.

    http://www.marketwatch.com/story/why-everyone-is-wrong-about-austerity-2013-04-26?pagenumber=2

  3. “Bringing true believers together in a group tends to compound the problem and ratchet up the denialism.”

    The secret to successful extremist political parties and religious cults the world over!