By Morgan Housel, Yahoo Finance Contributor
Let’s agree on three things:
- You have lots of beliefs.
- You don’t know everything.
- Therefore, some of those beliefs are incomplete, misguided, or wrong.
This isn’t a criticism. It applies to everyone, including me.
But while everyone knows they have to be wrong about something, few of us want to admit or think hard about what that something might be. Admitting you’re wrong about something you believe means admitting you haven’t fully thought things through. And while most of us are OK being told we don’t know everything, being told we have a lazy thought process is hard to interpret as anything but an insult.
So we have the ultimate cognitive dissonance: Fully aware that we’re wrong about something but unable to admit being wrong about anything.
In her book “Being Wrong,” Kathryn Schulz writes:
Our indiscriminate enjoyment of being right is matched by an almost equally indiscriminate feeling that we are right. Occasionally, this feeling spills into the foreground, as when we argue or evangelize, make predictions or place bets. Most often, though, it is just psychological backdrop. A whole lot of us go through life assuming that we are basically right, basically all the time, about basically everything: about our political and intellectual convictions, our religious and moral beliefs, our assessment of other people, our memories, our grasp of facts. As absurd as it sounds when we stop to think about it, our steady state seems to be one of unconsciously assuming that we are very close to omniscient.
Peter Thiel says the most important question to ask someone interviewing for a job is, “What important truth do very few people agree with you on?”
I think another good one is, “What’s something you strongly believe that’s likely wrong?”
It’s such a strange question, nearly impossible to answer without contradicting yourself.
But it’s an important question for one reason: In many fields, particularly investing, you can make more progress getting ahead by avoiding mistakes than you can making brilliant decisions. Charlie Munger put it this way: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Investing is simple, but surprisingly difficult. Especially for individual investors, the idea of “Buy some index funds in your Roth IRA, add a little bit each month, leave it alone for 30 years” is painfully simple, yet something only a small group of investors actually pull off.
When something is simple but difficult to achieve, the right question to ask isn’t, “What can I learn to help me get better?” It’s, “What belief is getting in my way that I should let go of?”
It’s when you should ask, “What do I strongly believe that’s likely wrong?”
There are two reasons we hold onto things that aren’t true.
One is the seductive idea that the world is simple. We love arguments like, “If the Fed raises interest rates, stocks will fall” because they’re logical and move from start to finish in one short sentence. But arguments of “If X, then Y” rarely work in something as complex as the economy, because there are a billion hidden variables between X and Y.
“When the Fed prints $4 trillion, inflation will spiral out of control,” is a belief that seems as reasonable as it’s been wrong for almost a decade now, because the mechanics of monetary policy isn’t the kind of thing that can be summarized in 12 words. We need to be able to explain to ourselves why and how things happen, but when things are staggeringly complex we’re prone to oversimplification, which means a lot of the stuff we believe in just isn’t true.
The second reason is that facts change faster than opinions. In his book “The Half-Life of Facts,” Samuel Arbesman writes:
Facts change all the time. Smoking has gone from doctor recommended to deadly. … We used to think that the Earth was the center of the universe, and our planet has since been demoted. I have no idea any longer whether red wine is good for me. My father, a dermatologist, told me about a multiple-choice exam he took in medical school that included the same question two years in a row. The answer choices remained exactly the same, but one year the answer was one choice and the next year it was a different one.
Here’s Munger again on how hard it is to let go of a fact even when it eventually changes:
The human mind is a lot like the human egg, in that the human egg has a shut-off device. One sperm gets in, and it shuts down so that the next one can’t get in. The human mind has a big tendency of the same sort. According to Max Plank, the really innovative and important new physics was never really accepted by the old guard. Instead, a new guard came along that was less brain-blocked by its previous conclusions.
Things many investors strongly believe but are likely wrong about include:
“I understand my risk tolerance.”
“I’m unemotional about money.”
“I’ll get out before the market turns.”
“I’ll buy back in after the crash.”
“I know something about this company that others don’t.”
“The recession was caused by [x].”
So many of us believe these things. And so many of us are completely wrong about them.
Since I’ve been 17 years old I’ve been on the treadmill of “Once I have $Xeverything will be great, easy, and worry-free.”
And of course, X has been a moving target for as many years.
No matter how many times I realize this mentality is wrong, it’s too appealing to let go of. I’ll probably believe it — and be wrong — forever.
Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal.