Narrative fallacy, halo effect and Power of a Story.
Woke up with a sudden and loud music of my phone,(ringtone of ACE ventura’s favorite dialogue, ‘ALL Righitie Then’) and while i was still rubbing my eyes, my over zealous value investor friend on the other side urged me to open my computer and check professor’s latest BLOG
And so i did and read the whole 23 pages first thing in the morning. Imagine that!!! well you cannot say NO to a value investor can u, for he will not let you in on his next big thing.
Anyways, before i pen down my exact thoughts arising out of my cynical, skeptical, contrarian and part crazy, part paranoid mind, let me get disclaimers out of the way.
I have huge respect for Prof Bakshi and do not doubt even for once his credibility, Integrity and selfless love for teaching and imparting knowledge. I have learnt a lot from him.
Formalities out of the way, lets get to business. Seven Intelligent fanatics of India.
Anytime I hear a story of greatness, achievement and its corresponding reasons, use of the word ‘BECAUSE’, somehow my antenna stand up for potential baloney. This special antenna facility is partly developed by extensively reading Mr Taleb and partly because by nature I m a non believer.
“Finding reasons of success, after the fact is called Narrative fallacy”.
Now, I don’t want to be a contrarian for the sake of being one. I want to evaluate a situation, take my stand on it and if that stand happens to be a contrarian one then be it. And I would like the readers (including hardened value boys) to at least hear me out before discarding this article.
Lets start with a story as narrated by Nasim Taleb in his book the black swan.
The story of the drowned worshipers.
More than 2000 years ago, Roman Orator and Stoic, Cicero presented this story.
One Diagoras, a non believer in the GODS, was shown painted tablets bearing the portraits of some worshipers who prayed, then survived a subsequent shipwreck. The implication was that praying protects you from drowning.
Diagoros simply asked, “where were the pictures who prayed and then drowned”?
The drowned worshipers, being dead, would have a lot of trouble advertising their experiences from bottom of the sea. Would’t you think.
Or in our example, those bankrupt companies who had all the ingredients of integrity, passion and intelligence will have a hard time finding a professor to promote them.
This bias extends to the factors responsible in success of any idea, religion, business, illusion of skill etc. What system followers also call as a survivor ship bias, Nasim Taleb calls it the problem of the silent evidence.
“Silent Evidence pervades everything connected to the notion of history. History, i will repeat, is any succession of events seen with the effect of posterity” Nasim Taleb.
A bias is an error between what you see and what actually is. A bias is about seeing patterns. In that sense both technical analysts and moat investors are alike. One sees head and shoulders (H&S), the other finds pattern in success, finds the “because” of success. Gives it names, calls it integrity, Intelligence and passion (II&P)
Madonna said it best in her song “Frozen” to be honest, You will only see what your eyes want to see, thats coz ur heart is not open, ITS FROZEN.
So what am I saying. Is Integrity, passion and intelligence bad. Not at all, these are definitely good traits to have. What I am saying is that to form an axiom that these traits lead to successful business, we need to invert this on its head.
Do companies without these traits struggle all the time. Well I know a 1000 people who actually became financially independent through Reliance Industries. And they don’t really set the scaling machines on fire when it comes to integrity. In fact if there was a Integrity weighing machine, and Reliance was standing on it, a warning would come, “please stand on the machine before the stipulated time”
How about UNITECH or JSW I can go on and on. Normally 01 black swan is enough to prove that all swans are not white. In this particular scenario, there is very little correlation between the II&P indicator and success. In fact, I m tempted to say, its Risk reward is worse than (H&S) not sure back test needed.
I regret to say, all the fanatics mentioned by prof (including the 8thone) are just the beneficiary of disproportionate luck compared to their peers. There is nothing more to it.
Its very easy to pick a winner and build a STORY around it. By mechanism of retrospective determinism we will find the “cause” that we are searching for. You will find whatever you are searching for, if you try hard enough.
Don’t get me wrong, I am not saying these are bad companies. They are awesome companies. What I am saying is that their UNIQUENESS is not that UNIQUE. The same II&P indicator in a not so lucky company is bankrupt now, and you didn’t even hear of it precisely because nobody will make a story out of it.
The reason I am writing this is that Authority and Expert create its own BIAS. Another devil to handle. The friend who called me has taken position in all of the companies and sipping on them every month. I am not saying its a good decision or bad, that is outside the scope of this article anyways.
What i am alluding to is something you guys must have noticed in Autobiographies too. You see, losers don’t write autobiographies, do they.
The entire notion of biography is based on arbitrary ascription of a causal relation between traits and subsequent events. So if Rahul Dravid writes in his biography that shagging has helped him in his forward defense. Lo hold and behold, you will see a million impressionable minds spending too much time in bathroom.
Let me end this article by saying that its a journey for me too. I may look back 10 years from now and feel naive about this piece. But as of today this is what I feel. The role of luck is understated so much that we start seeing patterns where none exist. And our default state is so lazy, that we despise actual thinking and are more than eager to find a guru and ape him blindfolded.
Comments are welcome…..
please check the comments section to read a fascinating conversation that ensued between Manish Dhawan and Prof Sanjay Bakshi.
Originally published at www.mysticwealth.in on July 14, 2015.