In my 28 years of trading, there was a time or two when a devil’s advocate would have been welcome. The problem is you never realize it until after you’ve lost a lot of money. From Charles Hugh Smith at oftwominds.com:
If those on the opposite side of the trade are viewed as threats rather than friends, it’s time to revise the analysis.
Of the many self-generated dangers investors face, few are more dangerous than confirmation bias, the comfort we experience seeking out views that confirm our own positions and our resistance to studying opposing views.
Confirmation bias is both self-evident and complex. We all understand the psychologically soothing feeling when others heartily agree with us, and the frustration, anxiety and sense of being threatened we experience when our core positions are challenged.
But there’s more to it than just that. Taking a position with conviction empowers us, for by publicly espousing a forecast, prediction or position, we’re implicitly saying, “When events show I’m right, that will show I’m smarter than the average bear.”
If we push our position and conviction to an extreme and shout it out loudly enough, we’ll attract those seeking to confirm their own biases. Confirmation bias thus generates a self-reinforcing feedback loop, as those shouting the loudest attract those who agree with them, rewarding their conviction with “likes.”
We all know the danger of marrying your position, that is, taking not just a financial stake but also an emotional stake that eventually becomes entwined with our identity. What may have started out as a calculated risk morphs into an all-or-nothing reflection of our identity. Any challenge becomes a threat to our selfhood.
Conviction is good, but a hedge and a Plan B are even better. Hedges and Plan Bs arise from a simple question: what if I’m wrong?