7/19/2019 Weekly Update: Life in a Post-Rationalizing World
by Zach Marsh on Aug 8, 2019
S&P 500 +1.61%
10 Year Treasury -0.16%
Weekly Update: Life in a Post-Rationalizing World
This past week marked the 50th anniversary of the Apollo 11 moon landing. Next month marks the 50th anniversary of the Charles Manson murders and Woodstock. Three events, which have since defined the late 60’s, transpired over the briefest of periods. Combined, all three seem to embody the spirit of the entire decade: hope, inspiration, and misguided, tragic horror.
The 60’s offered many notable events. The significance of many of these events were felt and known at the time they transpired. No one could doubt the historical significance of the Kennedy or King assassination. The moon landing was destined to be historically significant. But the importance of many others were indeterminant at the moment they occurred. The Tet Offensive, a military defeat for the North Vietnamese, proved to be a reality check for the Americans, and ultimately turned the tide of the war in favor of the North. The significance of that battle, at the time, was probably largely dismissed by military brass, but in the end, it was anything but.
Determining the significance of our experiences is what complicates decision making. Many people will often ask: “What do you think of XYZ stock? It seems like the latest, fill in the blank, should really benefit them.” While sometimes we can determine true catalyst for a company’s growth prospects, typically the events we attach importance to turn out to be insignificant in the long term.
Causational events are best determined after the fact, and even then, they are extremely difficult to assess. One reason we struggle to determine the significance of events and information is that we suffer from confirmation bias. We selectively choose information which tends to confirm our pre-existing belief. If we like XYZ stock and we want to buy it, we tend to select information which confirms our belief: call it post-rationalizing. Likewise, if we don’t like XYZ company and we think it is overvalued, we look for information which confirms that belief. Secondly, some information is unknown or concealed from us which would consequently minimize the information that we are currently granting importance to. Either way we are making decisions based upon incomplete or biased information.
To combat these challenges it is important to build models which have a predetermined information filter. Evaluate alternative decisions or investments by comparing similar information. There can really be no perfect model, but any model which eliminates some of our cognitive biases is a step in the right direction.
Thanks for reading,
Zach and Dave
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