Mistakes Were Made

Somewhat related to my post yesterday on low-cost index tracking funds, I came across this post today from Dan Solin, author of the Smartest series of books. 

The message about low-cost index funds is really not the point. What was interesting to me was his observation that for many people, pre-conceived beliefs or ideas are immune to evidence. 

The betting trading world has more than its fair share of charlatans, yet once lured in, their gullible followers are somehow able to ignore evidence that proves, to any impartial observer at least, their hero to be a fraud.

One recent example is the now infamous Caan Berry, whose claims of making £100,000 a year from full-time trading has been discredited by evidence both direct and circumstantial. 

Direct evidence shows that he was actually selling Solar Panels, and thus was clearly not full-time. We also know that the registered address for Caan is rented out for around £900 a month.

Those are facts. Circumstantial evidence leads a rational person to question why such a high earning individual would live so shabbily relative to their claimed income, and question whether his living arrangements mesh with the claim that he's in the market for a new car. 

One might also wonder why the Solar Panels job wasn't mentioned at all. It's revealing that Caan has no problem telling readers about his supposedly almost monthly holidays abroad, the high performance cars he supposedly drives and the copious amounts of beer he consumes, yet somehow forgets to mention the impact to his trading during his failed attempt over several months as a Solar Panels salesman. Presumably readers are meant to believe that selling Solar Panels pays at least £2,000 a week. It doesn't - perhaps half of that, which begs the question - why would someone give up the huge trading and tax-free income that Caan supposedly had / has, for £50,000 a Year, Boss, Worse Living? 

My guess for why followers ignore the evidence is that it's human nature to find it hard to accept that you were wrong. It's the same reason why traders sell winners too fast, yet hold on to the losers. 

If you've bought a video pack from someone, then it's preferable to believe the reason why it hasn't helped you is because you haven't got what it takes, rather than that you were duped. 

We all have a hard time admitting that we're wrong, but according to a new book about human psychology, it's not entirely our fault.

Social psychologist Elliot Aronson (co-author, Mistakes Were Made (But Not by Me) says our brains work hard to make us think we are doing the right thing, even in the face of sometimes overwhelming evidence to the contrary.

Here's the Dan Solin post in full:

I remember the meeting like it was yesterday. It had taken me almost a year to persuade the head of human resources for a mid-sized industrial company to agree to discuss their 401(k) plan with me.

It was a typical plan, populated with expensive, actively managed funds, with a couple of token index funds added to the mix. I was confident that, with the right presentation, I could persuade him to switch the plan to one consisting solely of a limited number of portfolios (at different risk levels) using low-management-fee passive funds. I knew I could demonstrate lower cost to plan participants and higher expected returns.

I wasn’t going to take any chances with such a large, promising prospect. I wanted to be sure my presentation was flawless. I arranged for the meeting to be held at the office of the fund family I was using, and asked them to have their best client-facing person lead the meeting.

They didn’t disappoint. The person they selected had a Ph.D in finance. He was engaging and articulate. His presentation was flawless. He reviewed the data showing the impact of high costs on performance. He discussed the peril of stock picking, market timing and chasing returns. He provided compelling data on the dismal performance of actively managed funds. He illustrated his points with a few well-designed slides.

I thought his presentation was brilliant – far better than anything I could have done.

I left the meeting elated and congratulated myself on making these extensive arrangements. The HR person seemed impressed and appreciative as well.

A week or so passed and I decided to follow-up. The HR person told me they were “considering their options” and would get back to me.

They never did.

What happened?

I made a logical assumption many of you embrace when dealing with prospects. I thought the use of logic and reason would change the mind of my prospect. A study by Yale behavioral economist Dan M. Kahan sheds light on why my premise was flawed.

In a series of experiments (discussed in this article) Kahan demonstrated the use of data aggravated pre-existing differences in positions on a variety of issues like climate change. One commentator summarized Kahan’s findings as follows: “A conservative Republican with strong science intelligence will use their skills to find evidence against human-caused global warming, while a liberal Democrat will find evidence for it. This is also true for issues like fracking, evolution, and the risks associated with gun possession – whatever your preconceived political belief on this issue, you’ll use your scientific intelligence to try to prove you’re right.”

The more data you provide to someone with a pre-existing belief, the more likely they are to align themselves with their belief, even though it’s contradicted by the evidence.

Of course, there are exceptions. People who are genuinely curious are more likely to be persuaded by the evidence.

How should this research affect your meetings with prospects?

If your prospect (like my HR person) believes strongly in active management, you’re unlikely to change his or her mind by overwhelming them with data. This approach may have the opposite effect. They will use your data to adhere more strongly to their pre-existing belief.

If I could go back and redo my meeting, I would have conducted it myself, without an impressive expert. I wouldn’t do any formal presentation. Instead, I would ask a series of questions that initially would establish an emotional connection between the prospect and me.

As the meeting progressed, my questions would focus on their existing plan and elicit his perceptions of its pros and cons.

I would let him lead the meeting, instead of trying to educate him on the merits of passive investing. I would try to elicit his concerns and then attempt to address them.

I still might not have converted him from a prospect to a client, but the odds of doing so would have increased significantly.