The Joy Of Being Wrong And The Danger Of Desirability Bias

“No one enjoys being wrong,” Daniel Kahneman told Adam Grant, who recounted their conversation during a recent interview, “but I do enjoy having been wrong, because it means I am now less wrong than I was before.”

Grant describes Kahneman, the psychologist seen as the originator of and greatest contributor to the field of behavioral economics, as “a living legend,” a lofty label that Grant himself is sure to earn any day now. So when these two sages, known for having gotten so much right, talk about their enjoyment in having been wrong, it provides a special comfort to those of us who find ourselves acknowledging our errors more often.

Being wrong sucks.

First, I love that they admit to their humanity—not just that they are occasionally wrong, but that it kinda sucks when the realization initially strikes. Helpful humbling is often initiated through a little hurting. And one of the best ways to salve that sting is to recognize the benefits to be gained from being more right into the future.

One of the biggest humblings of my career was also one of my most important lessons. I grew up professionally in financial firms that believed the primary justification for their existence was picking the right stocks, bonds and mutual funds at the right times for their clients. I genuinely believed this was the best use of our time and energy, until I was exposed to the evidence—that the vast majority of stock pickers don’t actually beat their benchmarks long-term and that allocating and reallocating active funds likely only increases the costs investors are virtually guaranteed to incur in pursuit of “alpha” that’s very difficult to sustain over the long-term!

Upset guy realizes he made a mistake
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Short-Term Memory Threatens Long-Term Success

Originally published CNBCWhen it comes to the market’s peaks and troughs, investors often don’t react as rationally as they might think. In fact, in times of extreme volatility or poor performance, emotions threaten to commandeer our common sense and warp our memory.

It’s called “recency bias.”

What the heck is recency bias?

Recency bias is basically the tendency to think that trends and patterns we observe in the recent past will continue in the future.

It causes us to unhelpfully overweight our most recent memories and experiences when making investment decisions. We expect that an event is more likely to happen next because it just occurred, or less likely to happen because it hasn’t occurred for some time.

This bias can be a particular problem for investors in financial markets, where mindful forgetfulness amid an around-the-clock media machine is more important today than ever before.

Try thinking about it this way. In the high-visibility and media-saturated arena of pro sports, every gifted athlete knows that the key to success can be found in two short words: “next play.”