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VIEWPOINT: Denial! Denial! Denial!

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“If you’re of the opinion that you’re a good investor, then it’s perhaps easier to ignore any failures or bad calls that you’ve made …”

Have you experienced this before …?

You buy a new flat-screen TV (or similar). One week later you’re walking past the store you purchased it from and see the word: “SALE”. Do you go inside and see what price it’s been marked down to? Or do you, like I do, just completely ignore it and walk past? I don’t want to see the very thing I bought one week earlier marked down and being sold for less today.

It’s a mental conflict that we experience. We’re being presented with evidence that our assumptions or beliefs are incorrect (the TV isn’t being sold for the same price we paid for it) and as human beings, we tend to exhibit a strong degree of denial.

We’re dead-set on believing something (the TV is being sold for the price we paid for it) no matter how much the actual evidence may be contradicting this. This is technically referred to as “cognitive dissonance”, which is the ability to hold two contradictory beliefs at the same time.

If you’re of the opinion that you’re a good investor, then it’s perhaps easier to ignore any failures or bad calls that you’ve made, as opposed to the alternative: perhaps considering that you’re not a good investor! Obviously it was the market’s fault, not yours!

The problem is our confirmation bias. We tend to seek out evidence that confirms the opinion we already hold and tend to avoid any evidence that might be contradictory to our opinion. People were content with believing that the earth was flat for many years, despite lots of opposing evidence that it was in fact round.

Raymond Nickerson termed confirmation bias “a ubiquitous phenomenon in many guises”. From ancient number mysticism, to witch hunting, medicine, judicial decisions, government policymaking and science, Nickerson was able to trace the permeating effect of this treacherous bias. It happens with lawyers and doctors, so why are we surprised that it could happen with investors?

Even CEOs can sometimes be cocooned in their own little world where they rarely receive negative feedback and then develop stubborn views that are resistant to opposing evidence. Companies and management that isolate themselves from their consumers should be treated with caution. There’s nothing like an annoyed customer to keep you grounded.

Stop believing the stories that analysts, companies and the media tell you just because it coincides with what you already believe. And don’t resist abandoning a theory just because you’ve already invested a lot of time and effort in it.

Having said all that, why take heed of what I’ve just written if it’s counterintuitive to what you already believe …? ❐

Author: Gizelle Willows CA(SA) MCom Finance is a Senior Lecturer in Financial Reporting at the University of Cape Town