From May 2018:
Richard Feynman, the Nobel Prize physicist, in a 1974 Caltech commencement speech said:
The first principle is that you must not fool yourself—and you are the easiest person to fool.
I certainly agree with the second part of that statement. We are usually very good at fooling ourselves. The first part of the statement is a lot more complicated. We engage in self-deception in many areas of life for various reasons. Kevin Simler and Robin Hanson in their insightful book, “The Elephant in the Brain: Hidden Motives in Everyday Life” argue that we often benefit from fooling ourselves. Upton Sinclair stated:
It is difficult to get a man to understand something when his salary depends upon his not understanding it.
To be sure, in Feynman’s field of physics, self-deception is mostly (always?) harmful. For example, the Wright brothers, needed to truly understand the basic laws of physics, to be successful in their aviation ambitions. No amount of self-deception would have changed the four basic forces that affect flying objects: weight, lift, thrust and drag.
In many other areas of life, self-deception is very useful. As Simler and Hanson argue, self-deception serves as a way to convince people of our own point of view which is usually beneficial to us. The best way to deceive other people is to fool ourselves. In one of Seinfeld episodes, George Costanza tells Jerry, “Jerry, just remember, it’s not a lie if you believe it”. The best liar is one who convinces himself that he is not telling lies.
In 1998, Henry Blodget, a security analyst predicted Amazon would trade for $400 within a year. Many investors thought that was an outrageous prediction. Amazon’s stock surpassed $400 within three weeks of his prediction – a gain of over 100%. Did Blodget predict the future or did he invent the future? In 2002, it was found from Blodget’s e-mails conflicted with his published reports. In other words, he was trying to fool the public but he, himself did not believe in his own predictions. He was subsequently banned from the securities industry and paid a $2 million fine. Which is worse in your opinion? A) an analyst who is foolish enough to believe outrageous valuations and tells the public about it or B) an analyst who does not truly believe the outrageous predictions but still has an incentive to lie to the public? There were many other analysts that made similar or even more outrageous predictions, but most were not charged with fraud. For example, Mary Meeker, a “star analyst”, contributed to the dot com bubble with bullish predictions. She was never charged with any wrong doing because she likely succeeded in believing her own predictions. Blodget, on the other hand, got in trouble because he failed at self-deception. If only he had fooled himself better… The Meeker and Blodget example demonstrate the value of fooling yourself. Blodget abided by Feynman’s principle – Meeker didn’t. He fared worse.
How self-deception benefits us
In a previous post I discussed how through self-deceit we can bend the truth. A statement starting as outrageous can turn into the truth eventually when enough people believe it. Elon Musk believes Tesla is going to be a very valuable company. He has to convince Wall Street and the public. The best way to convince them is to first convince himself. He has to believe Tesla’s greatness with great conviction. If he doesn’t, the public may realize that even he is not fully committed to the company. He cannot afford to show any doubt to the public and the best way to do that is to “fool” himself into believing the great destiny of Tesla. Through self-deceit he may convince the public that the company will achieve great profitability in the future. With enough support this may actually become the truth in the future. Without self-deception his chances fall considerably because of lack of funding by Wall Street. Feynman’s advice of not fooling yourself may not be such great advice for Musk or Tesla.
Self-deceit can have huge benefits in politics especially. Let’s look at some famous statements by recent US Presidents. I will keep the examples bipartisan. President Clinton famously stated, “I did not have sexual relations with that woman, Miss Lewinsky.” Was he lying or did he believe it? His “salary” depended on it so it behooved him to define sexual relations in a way that benefited him. Perhaps he listened to George Costanza. The public cannot accuse him of lying if he really believed it. Right?
In order to garner public support for the invasion of Iraq, President George W Bush used the threat of weapons of mass destruction as an excuse. Did he really believe that Iraq had WMDs? It benefited him to believe it as a way to convince the public and Congress to follow his lead. The public cannot accuse him of lying if he truly believed it. Right?
More recently, President Trump questioned President Obama’s US citizenship. Clearly that won him much public attention and perhaps led to his successful run for Presidency. Again, we cannot accuse him of lying if he truly believed it. In all three instances, the Presidents gained from fooling themselves.
To be sure, self-deceit can have devastating effects. Many gays all over the world for various reasons including cultural and religious for years fool themselves into thinking they are straight. Many even marry and have children only to be faced with the truth sometime later in life. Much emotional pain results when they finally come out of the closet for themselves and the many people involved in their lives. As an immigrant to the US, one of the societal aspects that I have greatly enjoyed is the country’s relative emphasis on individuality. While the US is far from perfect, it is still one of the easiest places where individuals can be true to themselves.
Fooling yourself is not limited to politicians and CEO’s. We all do it. I know I have done it countless times. Can I cite examples? Of course not! I have been so successful that I am not aware of the times that I do it. We can occasionally benefit from fooling ourselves, but on the downside when you gain from fooling yourself can form into a bad habit. Much like a gambler who hits the jackpot and becomes a gambling addict. Perhaps if you even take the long-term view, Feynman’s statement is true and we should never fool ourselves. The short-term gains are not worth the poor habits that get formed as a result. A behavior that can be successful in one area of life can be devastating in another area. Perhaps we better keep it simple and never try to fool ourselves even if there are some short-term gains. Habits tend to spill from one area of life to another. For example, football players get lots of positive reinforcement for being tough and hitting hard on the field. Is it more than a coincidence that many also engage in domestic violence? Self-deception, like violent behavior, can inappropriately spill to areas of life where it can have damaging effects. If you consider the contagious effects of self-deception, Feynman was right after all and we should avoid fooling ourselves at all times.
Self-deception in investing
One of the attributes that I like about Warren Buffett is that he has not veered from his investing principles throughout his career. As a small investor in the 50’s and 60’s, no amount of self-deception would have changed the intrinsic value of his investments. He bought stocks back then in companies that were selling significantly below their intrinsic value and sold them when they became overvalued. If he was wrong, he would admit his mistake and move on. Today, as a famous and large investor, he has the power to actually alter prices by his words. For example, he bought IBM shares years ago. He has since admitted that he made a mistake (disclosure: I am long IBM and believe it is undervalued and that Buffett made a mistake in selling the shares). He lost billions on that investment. The exact loss is unknown from public filings. He could have easily publicly touted IBM which would have undoubtedly raised the stock price. That would have resulted in a smaller loss for him. In other words, he could have tried to fool himself into believing that IBM was worth more which would have resulted in the public believing it is worth more which in turn would have resulted in the stock price rising. What impresses me is that after all these years he still does not engage in self-deception even if he could have some short-term gains from it.
Self-deception absolutely has no place for individual investors. As small investors, asset prices are independent of our beliefs. Our beliefs do not change a stock’s price much like how the physics of flying is independent of what the Wright brothers thought. We cannot change the price of a stock by our beliefs any more than the Wright brothers could change the physics of flying by their beliefs. This may seem obvious but most investors do not behave like it is. Take a look at the comments on investing boards such as Seeking Alpha and Yahoo. If you and friend want to go see a movie and you think the show starts at 5:00 and she thinks it starts at 7:00, you would never attack her for her belief. There is a truth which you can easily be checked. Similarly, in investing there is a truth that small investors have no power in changing. For example, XYZ company may not have enough liquidity and will likely declare bankruptcy unless it raises cash soon. You may agree or disagree with a statement like that but all too often passions rise and we get angry at other investors who contradict our beliefs. We get angry because the opposing person is interfering with our self-deception. We want to believe our investment thesis and so we fool ourselves into believing our own story even when markets could care less about what we think is true.
I have always said…
One of the most common ways that investors deceive themselves is by talking about their investments and explaining their rationale. In his brilliant book, “Influence: The Psychology of Persuasion”, Robert Cialdini writes about how American prisoners in Chinese prisons during the Korean War were asked to write political essays for a contest. They were slightly nudged to reason why America was not perfect. To the prisoners this was reasonable – after all, what country is perfect? For the essay contest, small prizes like cigarettes were handed out. It was important to keep the prizes small because had they been big, the prisoners could rationalize their essays “for the prize”. Once the prisoners “voluntarily” admitted that America was not so great, through their own writings, they were far more likely to deeply believe it than if they were force fed the beliefs through lectures. Many wise investors choose not to publicly discuss their reasoning for buying certain stocks. This is not to be secretive but to avoid becoming inappropriately married to one’s own ideas. Like the prisoners, they want to avoid becoming committed to their own investment thesis. On the positive side, sometimes defending one’s thesis forces one to dig more deeply into companies and, at times, realize that they do not make such good investments after all.
We often hear people defend their ideas by citing themselves as evidence. Whenever you hear the all too common phrase “as I have always said…” this phenomenon is occurring. I am certainly guilty of defending some thesis by citing my past self. We are indeed much more successful in fooling ourselves than others. When we quote ourselves, we serve to reinforce our own past beliefs. There is no benefit in doing that as a small investor. I will conclude this post by some famous “I have always said…” quotes.
I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple's CEO, I would be the first to let you know. Unfortunately, that day has come
I have always said, let ObamaCare fail and then come together and do a great healthcare plan. Stay tuned!
I have always said I would not have been President had it not been for my experience in North Dakota.
I have always said that your work stays with you for a long time, and I try to get involved in projects where I truly believe if I had to do them again, I would the same way.
I have always said that a woman should be like a good horror film: the more space is left to the imagination, the better
I have always said that human beings are multidimensional beings. Their happiness comes from many sources, not, as our current economic framework assumes, just from making money.
I have always said I was Bob Marley reincarnated.
I have always said the first Whig was the Devil.
I have always said there is only one thing that can bring our nation down - our dependence on foreign countries for food and energy. Agriculture is the backbone of our economy.