What can investors learn from the world of espionage?

Tuesday, Jan 31 2017 by
27
What can investors learn from the world of espionage

What do spies and investors have in common?

Whether it’s weighing up foreign intelligence or toying with investment ideas, the answer is we’re all naturally influenced by certain types of information more than others.

The problem with this is that the most persuasive sources - those that really drive our decision-making - can be the most deceptive. So what’s needed are a few lessons from the world of spycraft to help understand the risk.

There are numerous sources of information when it comes to investment ideas. Some common ones are online chat forums, tip sheets, company presentations, meeting management, and the experiences of friends and family.

That might sound like a reasonable base of information, but the sources in that brief list all share a common feature. They all offer us something that we can either see or hear first hand, or engage in emotionally. In behavioural science, this is known as the Vividness Criterion. When we’re offered concrete, vivid information from sources like these, we can be heavily influenced by it.

The catch though, is that these sources of information range in usefulness from being bias to downright misleading. They often work to confirm our own views (confirmation bias) or just give us very little meaningful evidence to make a judgment.

By contrast, other sources of information like aggregate or statistical data (particularly numbers) are harder to remember and so we risk giving them less consideration. That’s despite them being much more useful in arriving at a balanced opinion.

This problem isn’t confined to investing. Back in the late 1990s, a CIA veteran called Richards J. Heuer, Jr. was so concerned about the way intelligence analysts could mess up their evaluation of evidence, that he wrote a guide for them. One of the main upshots - and this is a big lesson for investors - is not to overlook the importance of statistical data.

Seeing should not always be believing

Heuer’s book Psychology of Intelligence Analysis, pulled together a lot of the academic research into the ways people process information to make judgements. Part of it explored some of the common biases that creep in.

With the Vividness Criterion, Heuer picked up on research by Richard Nisbett and Lee Ross. His point was that analysts are faced with vast swathes of information, but they’re more inclined to value certain parts of it. In particular, he…

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3 Comments on this Article show/hide all

Howard Marx 1st Feb 1 of 3
4

Interesting debate. I think Daniel Kahneman summed it up well when he said: “People who have information about an individual case rarely feel the need to know the statistics of the class to which the case belongs.”

Broad empirical data provide a valuable sounding board against which to check the credibility of any forecast.

Eg if consensus forecasts for BooHoo's future Sales suggest a 22% five year compound annual growth rate, one can simply ask "how often has this been achieved by other companies in the past?" The likelihood is exceptionally small, using history as a guide.

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timk 1st Feb 2 of 3
1

Would appreciate reading material on "fast and frugal" heuristics (Girgerenzer) applied to investment

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LongbeardRanger 1st Feb 3 of 3

In reply to Howard Marx, post #1

Interesting debate. I think Daniel Kahneman summed it up well when he said: “People who have information about an individual case rarely feel the need to know the statistics of the class to which the case belongs.” 


Yes, true - although, of course, the difficult thing here is to identify what the "class to which the case belongs" is. Is it all stocks? That's certainly the easy answer, but not necessarily the right one.....

As it happens I do share a degree of scepticism re Boohoo.Com (LON:BOO) (and am not invested in it - more's the pity, given its performance over the last year or so) but I think it's equally short sighted to apply conclusions from Kahnemann et al without appropriate thought or rigour as it is to assume that  consensus forecasts for Boohoo.Com (LON:BOO) 's revenue growth are likely to be achieved.


Rgds
Phil

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About Ben Hobson

Ben Hobson

Strategies Editor at Stockopedia. My goal is to help private investors learn and invest with confidence through the articles, ebooks and other resources we publish on site. I also occasionally bunk off to interview famous investors at expensive restaurants. I studied History at Aberystwyth University, trained as a journalist and covered business news and corporate finance before settling in as one of the first staff members at Stockopedia.  Away from Stockopedia I'm a mountain bike junkie. more »

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