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Welcome to my blog. I post my musings on life, work, finance, and personal development. Opinions expressed are mine, not those of my employer.

Don't be the sucker

Don't be the sucker

An old poker adage goes, "Look around the poker table. If you can't spot the sucker, it's you."

In the investment business, you learn quickly that the crowd is wise more often than it is mad.  For a contrarian thesis to succeed, you typically need several things: a high degree of confidence you are right; a high degree of confidence everyone else is missing what you are seeing; to actually be the one who is right; a well-defined catalyst; and luck.

The first point, confidence in your own thesis, is a tricky one. Two of the most common behavioral traps are overconfidence and confirmation bias. You have done all of this research, so you must know what you are talking about. Of course, what you don't know are all of the things you didn't discover during the course of your research. And there is always something. Worse still, once you have discovered a thesis, your brain rewards you with a dose of dopamine every time you see some new information that supports it.

The flip side to this, of course, is that most other investors also suffer from overconfidence and confirmation bias. There are indeed times that these biases affect people in a correlated fashion. (When people's biases are uncorrelated, it is called a "market." Markets usually go up.) The second factor you need for contrarian success is for there to be a correlated bias against your thesis.

Now, just because you are paranoid doesn't mean they aren't out to get you. Likewise, the fact that you believe one thing and everyone else believes the opposite does not automatically mean you are right. In fact, more often than not it just means you are missing something. See point 1. This is why the scientific method starts with an assumption that the hypothesis one wants to prove is false. Just the act of setting up your thesis as false will allow your confirmation bias to look for suitable examples of its falsehood, and potentially allow you to avoid a mistake.

Once you have done the work to establish confidence in your thesis, and in the thesis that others have missed it, and you have tried to find evidence you are wrong, what will happen that makes everyone else wake up to your idea? Are you persuasive enough that telling your story will do it? Or do you need some external stimulus? If so, what will it be, and when will it happen? That of course, requires some luck.

Although I apply this process primarily in the investment realm, it is a good tool for other part of life as well. Do you think the popular politician is corrupt? Why? Are there signs he or she is actually honest? When will everyone else come around to your way of thinking?

So get out there and play. But as you do, take a look around. If you can't spot the sucker, it is probably you.

If you think I don't know what I am talking about here, there is a good chance you are right. Let me know what I am missing in the comment section.

Update: An  article in FastCompany outlines a proposal by two college professors to offer a course called "Calling Bullshit." They list questions to ask any time you're looking at a set of results: "Think about the source of the information. Who's telling you this? How does it advance their interests? Find out where they got the information and look at the original source yourself. Is it a credible source? What were the methods used to arrive at the end result?" Asking yourself these questions could also indicate whether you might be fooling yourself.

Speak the other person's language

Speak the other person's language

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