I’m sure I’m right

Posted by John Charles Kernodle on November 12, 2019  /   Posted in Newsletter

“I’m sure I’m right.”

At some point in our lives, we’ve all said something similar. We’re convinced beyond a reasonable doubt that what we think we know is correct — until it isn’t. A big part of that certainty comes from something very human: confirmation bias.

We all have it to some degree. At different moments in our lives, and on a wide range of subjects, we seek out information that appears to confirm what we “know.” Along the way, we ignore (usually subconsciously) anything that contradicts what we “know.”

Then, we’re shocked when what we thought we knew turns out to be something different.

No surprise, it happens a lot when we talk about money and investing. For instance, I’m pretty sure I’ve heard just about every variation of, “I’ve found an amazing investment opportunity that’s guaranteed to generate huge returns.” But when I start asking questions, even general, high-level ones, the answers tend to skew in the direction of folks ignoring contradictions in favor of data and details that reinforce the amazing opportunity.

What makes this bias so tricky is that even very smart people can still get caught in the trap. It’s not a case of intelligence, but one of being human. That said, there are some good reasons to challenge ourselves to push back against the comfort zone of assuming we’re right.

Let’s start with the basic understanding that we like being right. Who doesn’t? But I believe that our desire to be right should be the start of our search and not the end. History shows us though that it can be tough.

In January 1920, Charles Ponzi opened a new firm, Securities Exchange Company. Promoting postal reply coupons as an investment tool, Ponzi convinced people they could make huge returns in excess of 400% buying cheap coupons in countries like Italy and reselling them in the U.S.

Convinced of Ponzi’s scheme, often by other happy investors, everyone from policemen to bankers started piling into his firm. By June, folks had invested $2.5 million. The numbers just went up from there with a million coming in per week, and then a million per day. But there was a catch (there’s always a catch): Ponzi still hadn’t figured out how to sell the coupons. He was paying off investors using other people’s money. There was no real investment, but that didn’t stop people from wanting to believe it was real.

During the height of his scheme, Ponzi made $250,000/day, and one newspaper even went so far as to imply that investing with Ponzi returned 50% after only 45 days. The day after it appeared, thousands descended on Ponzi’s office wanting to invest. However, only weeks later, it all came crashing down. Other reporters and financial authorities started asking questions about how Ponzi’s investment actually worked, and before long, his past as a convicted forger and other prior bad acts surfaced.

Investors panicked, and their demands for money toppled the scheme and collapsed six banks in the process. Investors ended up with 30 cents on the dollar with losses of $20 million or $256,759,000 in 2019 dollars. Almost 90 years later, Bernie Madoff pulled off an even greater heist, costing investors around $18 billion.

These schemes work because people want to believe they work and go searching for information that confirms their beliefs. In our search to be right, we sometimes ignore information that tells us something else. Who wouldn’t want to earn huge investment returns with little risk? But that shouldn’t stop us from considering ALL the relevant information — both the good and the bad — available to us.

It’s not easy, and in fact, it can be downright uncomfortable at times. But confirmation bias can trick us into making or sticking with bad decisions. And when those decisions involve money, the consequences can be life-changing.

My advice is pretty simple, if not always easy. Challenge yourself to ask, “Why might I be wrong?” Then, go looking for the answers. If nothing else, it may help you see additional angles you hadn’t considered that reinforce your original position. In the end, I think we’d all prefer to be really right instead of really wrong even though we’re sure we’re right.


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