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…