Here’s a quick test...
Let’s say I offer you this sequence of numbers - 2-4-6 - and ask you to figure out the rule that I used to create it. All you need to do is suggest some more number sequences to see if they fit my rule. I’ll tell you if they do or they don’t.
What might spring to mind - and studies show that it often does - is an obvious answer like 8-10-12. That does fit the rule, but what’s the rule? It seems a sure thing that the rule is something like adding 2 each time, but it isn’t.
You might now be tempted to make various other guesses at upward sequences of numbers trying to figure out what this damn rule actually is.
A much less obvious answer would be something like 5-3-1. It’s almost inevitable that this sequence would never work and so it’s utterly pointless suggesting it. Indeed, it doesn’t fit the rule - but that’s a big clue to the answer.
My rule is is that the sequence is just made up of ascending numbers, whether it’s 1-2-3, 2-4-6 or 57-65-133 - any upward sequence will do.
This test was created in the 1960s by a British cognitive psychologist called Peter Cathcart Wason. He found that the subjects of the 2-4-6 test often come up with more specific answers than they need to. Moreover, in trying to work out the rule, they usually offer guesses that fit what they already assume the answer is. This and other tests supported what Wason called Confirmation bias.
Falling in love
Confirmation bias is the tendency for individuals to look for and interpret new information in a way that confirms what they already think or believe. It weaves its way into many areas of human activity, from how we interpret online reviews to the ways in which doctors make a diagnosis. But one particularly worrying aspect of this behaviour is how it affects stock market investors. In simple terms, we’re at perpetual risk of falling in love with stocks and refusing to have a bad word said about them!
Confirmation bias generally rears its head after an investor has made an investment decision. That’s the view of Michael Mauboussin, the managing director and head of Global Financial Strategies at Credit Suisse and co-author…