Those Who Treat "Opinion" As "Fact" Are On A Dangerous Path
When we conjure up facts that serve our personal beliefs we lead ourselves into dreamland - The marketplace, like gravity, determines reality
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This Week’s Summary:
We can get emotionally involved with decisions.
Brain biases can make our opinions seem more valid.
This often this leads to simplification of the situation.
Analytic methods slow us down and add rationality.
Blending intuition with analysis is key and difficult.
Any technical trader has had to struggle with the mismatch between what they “believe” a stock will do and what it “actually” does. I can’t tell you the number of times that I have '“believed” a stock price would increase only to find it drop 5%! How can this be? Simple. The market doesn’t listen to me. It offers the consensus of opinion of the overall market about a reasonable price for a stock and then goes there. It doesn’t even send me flowers as I lose money and nurse my bruised ego.
I’m not the first person to have this struggle as is proven by the incredibly sophisticated fundamental and technical stock analysis tools in use. A wonder of the free enterprise systems is that when there is a need for something, someone will offer a product or service that fills that need. Every investor is looking for the most sure-fire way to know if stock will move up or down in the future because when stocks we own increase in value, we make money! WooHoo! But when it drops in price, we can lose money big time, and it is well known that we suffer the pain of losses more than we retain the joy of gains. This can make us irrational investors and traders.
covered this topic in his weekly newsletter related to tennis great Jimmy Connors.At some point in the future I may write in more detail about stock investing based on technical indicators and fundamental analysis. For now, I want to focus on the conundrum faced by our brain’s need to simplify the complex and how it can lead us to believe that our opinion is actually a fact. It takes training and discipline to learn how to catch yourself going down this path, and then pause to consider if it is the one you ultimately want to be on.
As a professor I work with my students regularly to help them understand the difference between “opinion” and "fact." One key aspect of credible academic work is that it presents a logical flow of information that poses a question, presents data related to that question, analyzes the data, and then forms a conclusion based on the findings. Notice that I wrote “presents data related to that question” and didn’t write “presents data that supports only my point of view.” This is the mistake that most new students, and many in the media, make. They will write a research paper that offers only sources that support one point of view (theirs) which makes it biased. Credible academic work must consider multiple sides of a topic. Even if I have expertise in an area, I must still support my professional “opinion” with the work of others to make my “opinion” credible as a source for my writing. Otherwise, it is just my opinion.
Published academic articles should have gone through a “peer review” process before being published meaning that other academics in the field reviewed the work and found it credible enough to publish. Peer review isn’t perfect, but it is the best we have so far for making sure that “opinion” (which requires no justification, education, or expertise) isn’t published as researched factual findings which are based on objective analysis by topic experts. You know what they say about opinions … everyone has one (as well as a specific part of their anatomy) but not everyone has a PhD or 30 years of industry experience behind their thoughts.
When thinking about a fact, the engineer in me likes to fall back on nature for a touchstone. If I drop my pen, it will fall to the ground, whether I agree with it or not. It is a "fact" because it happens every time I drop something. I may not like gravity, but gravity doesn’t care now any more than it did before or after 1687 when Newton first published his “law of universal gravitation.”1 It just is … and facts just are facts.
A person weighs 185 pounds. A woman graduated from college with a finance degree. The fact doesn’t have any meaning unless compared to something else. Then we can say that it has something of value to offer because then it offers information … it is compared to something else. So far in this discussion there isn’t much room for alternate interpretation. 185 pounds is 185 pounds. If I compare 185 pounds to 190 pounds then that means that 190 pounds is 5 pounds more than 185 pounds. This is another fact presented as information because of the comparison, and again it is not open to interpretation. The 5 pound difference is a fact.
It is when we start to attach meaning to the five pound difference that we start to move from fact to opinion because the 5 pound difference can mean different things to different people based on the observer’s context for interpreting the 5 pound change. If I am trying a new diet to lose weight and immediately gain 5 pounds I may wonder if the diet is doing me any good, which might increase my concerns about weight gain. On the other hand, if I am anorexic then I might be ecstatic at gaining 5 pounds! Again, the 5 pounds doesn’t care. It just is. It’s a fact. The interpretation makes it more squishy. (Is squishy a technical term?)
Hidden brain biases make this even more interesting and precarious. Our brains like to simplify things to help us understand the world around us, and our brains are lazy when it comes to thinking and analyzing, according to Daniel Kahneman.2
Our brains have a tendency apply a great deal of weight to the first few pieces of data or information that help it understand something, especially if it matches what we already believe to be true. This process shades our interpretation of the facts.
There are two hidden biases at play here: attribution bias and confirmation bias. Attribution bias is where we want so badly to find reasons to explain something that we attach more significance to seemingly related observations that help us “explain it” (looking for causality) than the observations would objectively warrant. For example, returning to our gaining 5 pounds example, if I believe that eating a hamburger equals a bad diet, then the fact that I ate a single hamburger could be thought of as the reason for the weight gain, when in reality a single hamburger would not do that.
Confirmation bias is where we filter out information that does not support our beliefs and focus on those with which we concur. When researching the 5 pound weight gain, I may well limit the articles I review to those that talk about the negative impact of eating hamburgers and ignore those that objectively look at the calories of a single hamburger (around 300 calories) compared to those needed to gain a single pound (around 3500 calories - nearly 9 times more calories).3 The facts simply don’t support the belief that a single hamburger caused the 5 pound weight gain, but I may not care. I may unconsciously choose to ignore or disbelieve those articles that do not support my belief and blame the poor hamburger.
You may be asking yourself, “How does this relate to stock trading?” Good question! Here is an example I wrestled with yesterday. I am in love with a company here in Illinois which makes electric vehicles and trucks, and has a standing order from Amazon to supply up to 100,000 electric delivery vehicles by 2030! I like the look of the cars, love that it is an Illinois-based firm, and am excited about the Amazon agreement. This is a stock I emotionally want to buy BUT … when I look at the stock chart data related to the technical performance of the stock, it is unlikely that the stock price will increase in the near future. My emotions are telling me “Buy” but the objective data (the “facts”) are telling me to “Wait.” The market doesn’t care what I believe, and will do what it decides to do whether I buy this stock or not. Just like gravity and my pen.
So far, the technical data analysis is winning and I have not bought the stock. BTW … it has continued on an overall downward trend so it is a good thing that I waited. I still look forward to the day that both my emotions and my analysis tell me to “Buy.”
Herein lies the value of data, information, and facts. It pulls us out of our emotions and forces the analytic part of our brain to intervene (Kahneman’s System 2 for those who remember the readings from last fall.) For now, I would rather invest my money in other stocks that have a higher likelihood of increasing in price than invest in this company that I love based on emotion or hype, and watch the price decline.
The more I am alive, the more I believe that success in life comes from finding a balance between what my intuition and emotions tell me and what objective reality displays.
The more I learn about unconscious bias, the more I understand why I have made poor decisions in the past based on a persuasive person, an emotional convenience, or a hopeful belief, only to find that the final ultimate results did not become what I expected. Sigh … If this has also been you, I feel your pain!
Have a great week and thanks for stopping by! ☮
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Wikipedia page: https://en.wikipedia.org/wiki/Newton%27s_law_of_universal_gravitation#:~:text=Newton's%20law%20of%20universal%20gravitation%20says%20that%20every%20particle%20attracts,the%20distance%20between%20their%20centers.
View my January 22. 1994 post for more on our brain’s laziness and confirmation bias.
I know … back to hamburgers. Sigh. :-)