Psychology of Misjudgment 4. Doubt-Avoidance Tendency

[LongHaul]

Sorry - this should of been a separate thread as I think it might be better to separate the biases.

 

4. Doubt-Avoidance Tendency

The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision. It is easy to see how evolution would make animals, over the eons, drift toward such quick elimination of doubt. After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do. And so man’s Doubt-Avoidance Tendency is quite consistent with the history of his ancient, nonhuman ancestors.

 

Being able to jump to conclusions comes in handy when chased by a man-eater. It’s less so when the instinctual need to run kicks in during a market crash.

 

But then there’s doubt in general, that can lead to added stress and anxiety around decisions. That can lead to putting off a decision entirely.

 

I would add that saying "I don't know can also be difficult to say/admit."  but if we put aside our egos that is often the best answer.

 

Antidote:  Thinking of how much we really know, may not know and leaving open the conclusion to disconfirming information until we get the right information.

 

Thoughts? Stories?

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DooDiligence

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Re: 4. Doubt-Avoidance Tendency

« Reply #24 on: Today at 07:18:55 AM »

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Quote from: LongHaul on June 06, 2020, 04:02:55 PM

4. Doubt-Avoidance Tendency

The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision. It is easy to see how evolution would make animals, over the eons, drift toward such quick elimination of doubt. After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do. And so man’s Doubt-Avoidance Tendency is quite consistent with the history of his ancient, nonhuman ancestors.

 

Being able to jump to conclusions comes in handy when chased by a man-eater. It’s less so when the instinctual need to run kicks in during a market crash.

 

But then there’s doubt in general, that can lead to added stress and anxiety around decisions. That can lead to putting off a decision entirely.

 

I would add that saying "I don't know can also be difficult to say/admit."  but if we put aside our egos that is often the best answer.

 

Antidote:  Thinking of how much we really know, may not know and leaving open the conclusion to disconfirming information until we get the right information.

 

Thoughts? Stories?

 

I think this has contributed to the popularity of questionable media outlets, including hyped up financial news / analysis.

 

People are lazy and like to have difficult things explained to them (religion, politics, finance) & will accept most of what comes from pretty pundits at face value.

 

Then again, what do I know?

[SharperDingaan]

The Victoria Falls bridge spans the Zambezi River, just downstream of the Victoria Falls.

The bridge is a favourite of bungee jumpers, paying USD 200/pop, to jump off the centre of the bridge, dipping their head at the apex of the jump in the flowing Zambezi River, about 420 feet below. Iconic location, iconic river, once-in-a-lifetime opportunity!

 

Doubt-Avoidance would say this is a dumb idea, and don't do it - as the bungee cord could break, you could do yourself an injury, etc.

Bungee jumping has been around for a while now, lots of people have done it without issue, the Vic Falls bungee equipment is state-of-the-art, and well over 100 people+ jump from this bridge every day. Kids through to the 400lb bricks suffer no injuries, and the payoff is the adrenaline rush and fame/claps of the crowd watching below. But when every observed jump is a success, and there have been lots of jumps, doubt-avoidance recedes.

 

Where the jumpers are dipping their heads, is a crocodile larder. Dead wildlife that came over the Falls, stuffed underwater beneath tree roots, for later retrieval - when hungry. Same as with fly fisherman attempting to get a bite, fishing with people will eventually do the same thing. Doubt-avoidance does not correctly factor probability.

 

The clapping after every jump IS celebratory - but it is to celebrate 'no-bite', not 'hail the hero'.

Doubt-avoidance is not good at live feedback.

 

After the jump, a % (usually small) of the bungee jumpers will customarily share a beer with the clappers. Most throw-up when they learn there's a pool on how many dips until a 'near miss', and a large payout on a solid snap. 'African roulette'.

 

SD

 

 

[fkw1979]

I see doubt avoidance all the time. When I do, it’s usually a lolapalooza. I think that may also be a reason that it is so hard to avoid.

[Guest longinvestor]

Do more men suffer from this tendency more than women? Specifically the inability to squash a prior conclusion ?

[SHDL]

There was a nice Twitter thread recently that is somewhat related to this:

 

 

Ironically one of the points being made in the thread is that value investors, as compared to say traders, have a relatively strong tendency to suffer from this bias. I think this is quite true.

 

This is also a bit interesting from a historical perspective because Graham (I believe) actually had a rule of letting go of losing positions after 5 years or something, which helps avoid this type of mistake. Sometimes good ideas get lost over time for whatever reason...

[jasonchin]

I think there is an element of overconfidence bias here. If you view the two together, it's simply the chicken or the egg causality dilemma. Simply a side note and can stem from the same psychological root cause. 

[mattee2264]

 

I'd agree that value investors don't deal with it well.

 

Buffett looks for sure things and no brainers. That is fine up to a point but requires amazing powers of judgement and results in a very limited opportunity set especially as markets are a lot more competitive these days. It can also result in thumb sucking as lingering doubts can prevent him from pulling the trigger.

 

Pabrai looks for limited downside (heads I win, tails I don't lose much) but this can often lead to judgement error because if a stock truly had virtually zero risk of loss (and some chance of gain) it would be trading at a bond-like multiple. And if upside is fairly limited then your winners can't offset your losers so you are very vulnerable to bad luck or mistakes in judgement.

 

Other concentrated value investors fall into confirmation bias and overconfidence traps and get burnt when they miss something in their analysis or get unlucky.

 

The Graham approach is to treat investing as an insurance operation. Provided the overall underwriting is good you will do pretty well even if quite a lot of the individual investments do not work out. But there is a lot of adverse selection going on these days so a lot of the low P/E stocks and low P/B stocks that in yesteryear would have mostly turned out pretty well these days more often than not end up being value traps. Most value investors try to be more selective and try to filter out potential value traps but this is no easy task.

[SharperDingaan]

Doubt is just uncertainty. Reduce the number of decision points (simplify), &/or change the probabilities, and the cone of uncertainty changes - but typically, not the decision to fight or flee. Therefore, either get comfortable with ‘good enough’ analysis (WEB approach), or comfortable with probability tail misinterpretation (options).

 

The more time, the wider a STATIC cone of uncertainty becomes. Whereas the width of the cone on a DYNAMIC cone of uncertainty, could actually be shrinking. Dynamic vs static? Same situation, assessed one quarter later, under updated probabilities. If the situation is ‘de-risking’, the width of the cone is shrinking.

 

Most value investors ‘kind-of’ get this – but not really.

Average down, and you are doing this. Swing trade, and you are doing this. Invest and you are doing this. Speculate short-term, and you are NOT doing this - you have placed a casino bet on the outcome of the STATIC cone.

 

Applied to our bungee jumpers?

The STATIC cone of uncertainty is not favourable. Keep the same probabilistic outcome, but simplify by omitting the rare negative event (crocodile snap), and promoting probability tail misinterpretation. You have not misrepresented, as the probabilistic outcome remains as it was – not favourable …. Lot like Robin Hood, or USO?

 

Engage the DYNAMIC cone of uncertainty. Have your beautiful and handsome repeatedly make the jump, and circulate amongst the crowd – head dripping. Simplify; accentuate ‘safeness’ via repeat observation, downplay the negative. The jumpers expected payoff (fortune and glory) became net positive, and the more successes (increasing favourable probability) the more positive. Long line-up of punters putting up their USD 200, and getting longer.

 

Our crocodile snaps, and the bungee jump collapses – for today.

The crowd just buys the cords, and is back in business tomorrow; new punters, short memory  …. Lot like US o/g shale companies, and CJ?.

 

Applied to the crowd?

The African sun is hot, beer needs to stay cold, and that is best done when well below the water surface.

Good beer, and good entertainment, dull the senses - and the inebriated are a lot slower than human fly’s. African roulette.

 

SD.

 

[Guest cherzeca]

 

I'd agree that value investors don't deal with it well.

 

Buffett looks for sure things and no brainers. That is fine up to a point but requires amazing powers of judgement and results in a very limited opportunity set especially as markets are a lot more competitive these days. It can also result in thumb sucking as lingering doubts can prevent him from pulling the trigger.

 

Pabrai looks for limited downside (heads I win, tails I don't lose much) but this can often lead to judgement error because if a stock truly had virtually zero risk of loss (and some chance of gain) it would be trading at a bond-like multiple. And if upside is fairly limited then your winners can't offset your losers so you are very vulnerable to bad luck or mistakes in judgement.

 

Other concentrated value investors fall into confirmation bias and overconfidence traps and get burnt when they miss something in their analysis or get unlucky.

 

The Graham approach is to treat investing as an insurance operation. Provided the overall underwriting is good you will do pretty well even if quite a lot of the individual investments do not work out. But there is a lot of adverse selection going on these days so a lot of the low P/E stocks and low P/B stocks that in yesteryear would have mostly turned out pretty well these days more often than not end up being value traps. Most value investors try to be more selective and try to filter out potential value traps but this is no easy task.

 

doubt avoidance can become "admitting mistake" avoidance.  this does tie into a bunch of other biases.  the question is how to deal with doubt and mistakes.  you bring up WEB, and it seems he decided to sell airlines at about the bottom.  so one can say he admitted his mistake, but was his sell action to blow out of all airlines the right action?

[LC]

Doubt I think is a necessary but uncomfortable feeling when investing. You are wading into the unknown.

 

Doubt avoidance is attempting to know the unknown, or exercise control over something you may not be able to control.

 

In my opinion doubt is unavoidable. It is impossible to know the future. Putting blinders on may feel more comfortable (and may incidentally still pay off), but I don't think it is ever smart to put those blinders on. You have to make calculated decisions with less than perfect information.

[CorpRaider]

Yeah, I prefer Kahneman's system type characterization/nomenclature and agree this is probably just a specialized artifact of what I prefer to think of as the overconfidence and confirmation biases.

[Guest cherzeca]

Yeah, I prefer Kahneman's system type characterization/nomenclature and agree this is probably just a specialized artifact of what I prefer to think of as the overconfidence and confirmation biases.

 

except after you have taken action, perhaps using fast system to eliminate or cabin doubt so you can act, I think you move into the slow system to analyze whether the action was right (whether doubt should have been recognized and given its due).  I find that I am more analytic after I have made a toe-in purchase than before

 

Edit:  put another way I have more doubt as to whether I did something wrong than I do that I am about to do something wrong

[fkw1979]

Here's a good one that took me a long time to learn. The key to rationality is flexibility in mindset. To never hold too hard on to your opinions b/c when you stop doing that you stop learning new things and getting smarter.

 

This is essentially the antidote to consistency / commitment which is one of the strongest forces but really it is probably a much larger and stronger negative lolapalooza which is why it may be so hard to avoid doing. It involves: commitment, consistency, doubt avoidance, incentive, easily accessible, reason respecting, twaddle, excessive self regard and just the natural tendency of feeling discomfort when trying to hold two opposing views in your head at once. Perhaps that in itself is a consistency + incentive + doubt avoidance lolapalooza.

 

Think about this one. This might be one of the most important things I have ever learned.

 

PS  As an aside, the world is made up of complex systems everywhere and when you understand how complex systems really work you realize how hard it is to "fully" grasp many things in life. The lolapalooza itself is a perfect example of a complex system working. That is why reasoning before understanding the idea of complex systems is so hard. It often is not just one thing that is involved when analyzing a problem, so if you are working on the premise that most of the things that you tackle are simple systems, you are like the proverbial one-legged man in an ass kicking contest. LOL

 

Longhaul, I may be jumping the gun talking about lolapalooza but like I said in my previous post when I see doubt avoidance it is always in a lolapalooza =)

 

Lolapallooza- a complex system made up of many inputs of varying degrees which feed on itself creating a stronger force through synergy via a positive or negative feedback loop

 

(Note: lolapaloozas can be positive or negative, you want to avoid the negative ones and utilize the positive ones; we need to think more in terms of lolapaloozas not one bias separately from another when trying to fully get at a problem involving complex systems, the world is mostly made up of complex systems so to look at a problem with the simple system "tool from your toolbox" is probably pretty low in usefulness and accuracy.)

[LongHaul]

Thanks FKW.  Excellent points.

 

To avoid such a rigid mindset I think it helps to also think in probabilities.  There is always a chance everyone is wrong about anything.  Nothing is 100%.  So if we allow a 5% chance that we are wrong about something (or perhaps anything) we think is a high probability, then we leave our mind open for new disconfirming information. 

 

It is an interesting term - an open mind.  To me it suggests that information can get in, and out. 

[Guest cherzeca]

"It is an interesting term - an open mind.  To me it suggests that information can get in, and out."

 

I think about this in terms of kahneman's system1 vs system 2.  I almost always react to new info quickly, using my biases.  an open mind permits one to progress to system 2 thinking and actual consider the new info