By Stuart Canning
As believers in behavioural finance, we always try to consider how forces that we are not aware of can influence the decisions we make. Often the ways in which information is presented to us can play a vital role in shaping these biases.
Many have written about how the rise of digital media in all its forms is having a profound effect on the way we think. A common argument is that mass communication, rather than building consensus and a sharing of views, may actually be creating greater polarisation.
It is not actually clear that this is true – this paper from a couple of months ago lays out the US evidence – but it certainly ‘feels’ as if it is. Irrespective of the broader social dynamics however, the new analysis of how digital media may drive our attitudes on an individual level could be another vital tool in assessing what is really motivating us when we make a decision.
Wedges: Are we being driven to more extreme points of view?
Last year Erik Fogg and Nathaniel Greene published ‘Wedged’. In it they argue that politicians and the media are incentivised to present increasingly extreme views, and that this polarisation of debate can influence our own thoughts. We find ourselves becoming ‘wedged’ as our own attitudes are hardened and more moderate voices are turned off.
Individual human beings are vulnerable to this process because of the way we form beliefs. As early as 1999 Cass Sunstein examined how we behave in group scenarios and discussed two related forces:
- First, ‘cascade effects’ can mean that people’s opinions tend to fall in line with the views of the group
- Second, polarisation can push people towards more extreme views if they are in a group of likeminded individuals
These forces seem to stem from age old behavioural biases: we want to fit in with the ‘tribe,’ we do whatever we can to avoid ambiguity, and we search for confirmation of pre-existing views.
What Sunstein noted (and subsequently discussed in two books), is that the internet provides conditions that serve to intensify the second of these forces. Rather than creating a global community, digital media allows us to surround ourselves with others like us (‘echo chambers’), and filter the information we receive (whether intentionally or through filter bubbles).
Is this relevant to our investors?
When it comes to financial markets as a whole, the idea of cascade effects is nothing new: investors are rewarded if they get on the right side of trends, professional investors are incentivised to fail conventionally, and herding becomes commonplace.
But when it comes to the polarising influences upon our own decision–making, there may be something novel going on. The Bloomberg terminal was launched in 1982 and has long been very much like twitter; a barrage of information with little or no filter as to importance. What has changed is the extent to which the tactics discussed in ‘Wedged’ are also now prevalent in financial communication.
As well as the rise of ‘finance as entertainment’ (as far as this is possible) which rewards more extreme views on TV channels and on blogs, there are other notable techniques that are more prevalent today.
Oversimplification and cherry-picking
In launching the episode blog and twitter account we have frequently been told that the goal is to keep material concise and to use as many images as possible.
This makes sense. People don’t have time to read all the material out there and prefer bullet point arguments. The below shows some of the simplistic narrative that is common:
Charts are particularly powerful because they combine all the features that humans look for. They can be interpreted quickly, they are free from ambiguity and they give the appearance of objective facts. Last month, Priceonomics posted a piece on how, as charts have become increasingly easy to produce, they have become the mainstay of media presentation.
The problem is that no “one chart” can explain a complex issue. Look at the recent debate over the ‘elephant chart’ which tackles global inequality. On an issue that is highly wedged, it can be seen how some have been happy to take the chart at face value when it confirms existing views, but others have dug more deeply when they disagree. This is exactly how we are tempted to use all charts and how they can easily fall into the same realm as the soundbites and meme-politics that we find on Facebook.
Tribes and confirmation
Although the world of finance has long been subject to information overload, it is now easier than ever to search out someone who shares your view. Moreover, while investors like to pretend that they are dispassionate it seems to be increasingly the case that our investments views can become closely tied to our economic and political attitudes.
Beliefs about whether we should buy gold, whether the next crash is around the corner, whether we are due for a period of secular stagnation and the like are often closely related to our views on society. A libertarian concerned with state influence is likely to make the case for gold, those angry about inequality are more likely to search for evidence that it is a constraining force on growth, whether UK equities are ‘a buy’ may be closely linked to whether or not we politically approve of Brexit.
In ‘Wedged’ the authors advise that we take careful note of our feelings when we see data: “Do you find yourself hoping certain data is true, and rejecting certain data that doesn’t agree with what you already think?” Investors have always had to tackle this because it is painful to lose money and even more painful to accept you were wrong. If the nature of digital media is serving to intensify these emotions by associating ideology with investment views then there is an even greater need to be wary.
Conclusion: on blogging
We were initially wary of launching a blog. The advantages of communicating openly with clients are clear, but would ‘going on record’ with a view cause us to be wedded to it? Would we be less willing to accept a mistake or a change in the facts simply because arguing the case had opened us up to confirmation bias?
Our conclusion was that much of our blogging would be self-reflective, examining behavioural influences on our own thinking, and that of others. As a result it should provide a shield against some of the challenges since self-awareness is a key element to avoiding bias.
It remains to be seen whether this will be the case, but it seems that with new and ever more powerful influences coming from the nature of communication today, trying to identify and protect against biases may be more important than ever.