What American Idol Taught Me About Confirmation Bias

Watching American Idol last night, I was struck by something Steven Tyler said during the judging portion of the show.   This isn’t a quote he made up, but it’s the first time I’ve heard it.  Randy Jackson was evaluating one of the contestants, and he panned her.  Steven spoke next, and said that he disagreed with Randy and that he liked the performance.  This elicited a “Whatttt?” from Randy, to which Steven replied:

“I could agree with you but then we’d both be wrong.”

It’s a fantastic line, and it’s highly relevant to a mistake I feel most people make in their trading and investing process.  It’s a natural human tendency to seek out conforming opinions – people who agree with us.  It makes us feel “right” and good about our decisions.  In the investing world, however, this is dangerous.  When I form an investment thesis, I’m always trying to figure out why it’s WRONG, not why it’s RIGHT.    I want to know the thesis of the guy on the other side of the trade as me – and then I can evaluate whose thesis is stronger.  Ideally, I get comfortable with the thought process of the other side of the trade, can confidently debunk it, and gain confidence in my position.   More likely, I realize what I may have been missing, or understand how the data can be interpreted differently,  and learn what I need to keep an eye on while carrying out the trade.

Unfortunately, there aren’t a lot of places online where one can have an intelligent discussion with people who disagree with their trading thesis.  If you look at the comment threads on Seeking Alpha, or, if you’re feeling masochistic, Yahoo Finance, you’ll see that conflicting viewpoints are generally met with derision.  Longs call anyone who disagrees with them a “shorty” and dismiss the information, while shorts accuse opposing viewpoints of trying to pump the stock.

I’ve written several times about JOE – where Bruce Berkowitz and David Einhorn are on opposite sides of the trade.  Einhorn painstakingly laid out his short thesis, which is a tremendous asset for Berkowitz.   Do you think Berkowitz would have replied, in the comments section of Einhorn’s presentation, Yahoo Finance style: “YOUR AN IDIOT, SHORTY – JOE IS GOING TO $1,000!”  Of course not – I’m sure Berkowitz tore through Einhorn’s thesis and used it to strengthen his own.  It doesn’t appear that Berkowitz has changed his mind, so maybe he disagrees with Einhorn’s view of the future of Florida real estate, and the quality of JOE’s land.  Unfortunately, it’s usually not as easy as one side of the trade having bad data which can easily be corrected and used to incorporate a more accurate thesis.

Anyway, if you want to mature as a trader/investor/thinker, seek out opposing viewpoints, not confirming ones.

As for American Idol, there are a few contestants who I think will be worth watching.  I’m interested in seeing performances from Casey Abrams, James Durbin, Paul McDonald, Jacob Lusk, and Clint Jun Gamboa on the guys’ side.  On the girls’ side, I think that it’s worth tuning in to see what Haley Reinhart, Lauren Turner, Naima Adedapo, Thia Megia, Rachel Zevita and Julie Zorrilla will do.

-KD

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