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Investor Psychology

The Mother of All Investing Evils

Rid yourself of the “bias blind spot” before addressing other problems that could affect your financial decisions.

Will Rogers once said: “It’s not what you don’t know that will get you in trouble, it’s what you think you know that ain’t so.” And one of the big things we think we know is that we’re unbiased. Experts say that until we get over that notion, we’ll have a hard time fixing all the other biases that can hurt our investing results. That makes this “bias blind spot” the mother of all psychological investing problems.

Emily Pronin, a professor of psychology at Princeton University, says we fall victim to the bias blind spot even when we’re shown incontrovertible evidence that it exists. “I spend a whole lecture describing this bias blind spot and I give my students lots of examples,” says Pronin. A few days later, she says, a graduate student from another class asks the same students how much they show bias relative to other kids in the class. “And they still still tend to say they’re free from the bias, soon after they’ve been taught about it for 50 minutes,” says Pronin.

That’s one of the things that makes the bias blind spot so insidious. We easily see it in others, but we’re much less likely to see it in ourselves. Take the halo effect, for example. The halo effect is our subconscious tendency to assume that someone who possesses positive qualities in one area also stands out in other areas -- even when we have no evidence that’s true. For example, if someone is likable, we think that person is smart, too. One study showed that Americans are twice as likely to think the other guy will fall for the halo effect as they themselves will.

This can cause particular problems for investors who think, for example, that a well-dressed broker who claims to have a diploma from an Ivy League university is more trustworthy than a casually dressed broker from a less-prestigious university.

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Another bias we see in others that we tend not to see in ourselves is optimistic overconfidence. This is our unrealistic optimism about our own futures, such as thinking we will eventually be wealthy.

For articles on the psychological biases that can take a toll on your investments, please see our Investor Pscyhology special report.

Pronin says people deny that they suffer from predispositions because they occur subconsciously. “In order to determine whether they are biased,” she writes, “people generally look to their conscious motives rather than to their actions.” So when a bias occurs subconsciously, people don’t notice it and assume that they’re unbiased.

How do we come to grips with the possibility that our subconscious biases our investment decisions? Pronin came up with a simple solution: She had students read an article titled “Unaware of Our Unawareness” that convincingly lays out the case that our subconscious can influence our attitudes and behavior. The article doesn’t even mention biases, just “unawareness.”

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After reading the article, one group didn’t show the usual tendency to deny their biases. Those who skipped the article did.

How did Pronin find the perfect article to help beat the mother of all biases? She made it up -- complete with a fake author, citations and footnotes. But that didn’t make it any less useful, of course.