The Rational Investor #034: Michael Lewis on Subtle Influences
Happy Saturday to you,
Welcome to the 34th edition of The Rational Investor Newsletter.
I just finished reading the book The Undoing Project by Michael Lewis, which details the lives of Amos Tversky and Daniel Kahneman. I really enjoyed it and consider it to be a cross between a biography and a “lite” version of Kahneman’s book Thinking Fast and Slow. I had lots of highlights to choose from for this week’s note, but I think the one below illustrates (in the fewest words) how we are influenced in our decision-making in ways we can’t begin to comprehend.
Onto the main event…
Here’s Michael Lewis on Subtle Influences:
“At the start of the first class, the professor asked him and everyone else in the class to write down the last two digits of their cell phone on a sheet of paper. Then she asked the class to write down their best estimate of the number of African countries in the United Nations.
Then she collected all the papers and showed them that the people whose cell phone numbers were higher offered systematically higher estimates of African countries in the United Nations.
Then she took another example and said, ‘I'm going to do it again. I'm about to anchor you. Here. See if you aren't screwed up.’
Everyone had been warned; everyone's minds remained screwed up. Simply knowing about a bias wasn't sufficient to overcome it.”
This book is filled with example after example of our flawed thinking and all the weird ways that our decisions are influenced by outside forces—even when we would deny the impact on our decisions because we can’t imagine such a connection existing. And yet, the evidence is irrefutable.
And as I read through all of the examples in the book, such as the one above, there was a single thought that I kept coming back to, which was this:
If our decisions and probabilistic calculations are influenced by things that have nothing to do with the topic at hand, how much MORE are we likely to be influenced by information that appears to have relevance?
For instance, if random numbers influence people’s guesses, as in the example above, how likely is it that the near-constant exposure to negative media would impact our ability to make rational, long-term investing decisions?
I’d wager that this impact is both undeniable and almost impossible to overcome, given enough time and exposure. Eventually, you’re almost forced (probably against your best judgment) into a pessimistic viewpoint to match the exposure, which is antithetical to successful investing.
Understanding the incredible impact of what would appear to be a subtle influence on our decisions should cause us to take great care in choosing the information that we consume.
It’s a minefield out there…
Lastly, here’s one more bonus quote I want to share from Amos Tversky when he was speaking with an American economist simply because I just loved it:
"All your economic models are premised on people being smart and rational, and yet all the people you know are idiots."
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
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