Updated: May 17
I occasionally like to ask people if they are in denial about something or other. If they say ‘no’, I smile. Then, when they see the irony, they smile too. It is possible they are not, but how would they know?
"Half the viewers missed the gorilla"
Most of us like to think of ourselves as reasonable, unbiased beings. The world around us looks objectively real, something that unquestionably is outside of us. However, what we see, hear, smell and feel is purely the product of our consciousness. Take that away, and what you thought of as objective reality no longer exists. To exist, it must be perceived.
The point is that since the world is a product of our imagination rather than real, we are liable to be unaware of the extent to which our perception is distorted. This lack of awareness can cause us, at times, to make terrible decisions, the worst of which often relate to investment.
One particular form of lack of awareness is called ‘inattentional blindness’. Perhaps the best-known example of this is the experiment in which people are shown a video of a circle of basketball players, then asked to count how many times they pass the ball to each other. After 30 seconds or so, a person dressed in a gorilla costume saunters into the picture, walks among the players, at one point facing the camera pumping its chest, then exits stage left. Remarkably, half the viewers missed the gorilla. Some even looked right at it and still did not ‘see’ it.
If you have not seen the video, you may be certain you would be in the half that sees the gorilla. However, there is a good chance you would be surprised (a moot point now that I have spoiled it).
The gorilla video is just one example of many that expose the flaws in our perception and behaviour. Another one that may be particularly relevant to investing is the Asch Conformity study. In 1951, Dr Solomon Asch designed an experiment to test a person’s likelihood to conform when under pressure to do so. Participants in the experiment were shown pictures of lines of obviously different lengths, and then asked to identify the longest. The trick was that all the participants, apart from one, were actors and had been told to give a wrong answer. Extraordinarily, the true participant in each trial almost always agreed with the actors, even though they knew the answer was wrong.
The same behavioural traits may be in operation when we feel compelled to join the herd and buy towards the end of a bull market, or sell near the end of a bear. Such actions are often accompanied by the overwhelming feeling that we are doing the wrong thing. Psychologist and author Bob Cialdini has studied in detail why people comply with requests in everyday settings. In his book Influence, he lists six different ways in which people can be persuaded to do something (the book is staple reading for those in the advertising industry).
The six are reciprocation, consistency, social validation, liking, authority, and scarcity. He provides some lovely examples of each, from real life situations.
The one that I have always liked is the Chicago restaurant that had a novel way of dealing with its problem of no-shows. Instead of requesting people to call them if they changed their plans, staff were told to ask, “Will you please call if you have to change your plans?” then wait until the caller committed. No shows dropped from 30 per cent to 10 per cent immediately.
According to Wikipedia, there are 175 identifiable cognitive biases. It is likely that many of these distort your own thinking. Unless you are in denial of course.
Published in Trustnet
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.