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the emotional part of your brain is experiencing. And if in that
moment you are suddenly called on to make a choice, “Should I
sell this stock or should I hold it?” ... If you’re making that choice
at that moment while Jim Cramer is screaming in your face, you
will not buy and it’s highly unlikely that you’ll hold ... because all
of that screaming, all the red, all the downward-pointing lines are
so upsetting that you will make a negative decision, even if you’re
not aware at that moment of how upset you are.
The flip side of this is unconscious bias. Just as you can
Most people can‘t do what they should, so we need to
advise them to do what they can.
have a feeling that you’re not aware of having, you also can
have preferences that you don’t realize you have. The simplest
example is what psychologists call “implicit egotism,” which is
a really bad term for liking whatever is closest to you in some
way or another. For example, people are 65 percent more
likely to marry someone whose surname begins with the same
initials as their own. Psychologists have looked at hundreds of
thousands of data points and demonstrated very clearly that
this is true, and that people named Dennis and Denise are
much more likely to become dentists than you would expect
by random chance. People named George are more likely to
become a geoscientist then you would expect by chance alone.
We all come with these strange, unconsciousness preferences.
We don’t think we think that way, but we do.
The best example I can give is in June, I was making a speech
about the book in Edinburgh, Scotland, and I was at one of the
largest global equity managers in the world, and I put up a slide
about these forms of unconscious bias. All the Scots in the room
were chortling: They couldn’t believe how stupid Americans are,
and that anybody would actually do something like this was just
beyond them. Then the chief investment officer of the firm said,
“Well, what about ...?” and he named a stock that this firm is
heavily overweight in. It turned out the ticker for the firm they’re
overweight in matches the firm’s own initials. He said, “I’m very
glad that you pointed this out because I never would’ve realized
it. We probably do have an unconscious bias and now we’re
aware of it. Now maybe if the time ever comes that we need to
sell that stock, we can make a more objective decision.”
So people do stuff like that all of the time, and I’m prepared
to bet that if we did a survey of all equity fund managers within
America and we simply found out the eye color of all the managers
and we then went and looked at their portfolios, we would
find that UPS is over-owned by brown-eyed managers and Jet
Blue is over-owned by blue-eyed managers. I haven’t done this
research yet, but I am very confident that that hypothesis is a
good one. This is something that investors need to be aware
of: Active managers may think they are choosing stuff for one
reason, but actually it’s almost as if the choice has been made for
them by unconscious biases they don’t even realize they have.
JoI: Stock analysts frequently develop relationships with and visit
the companies they cover. Do you think that familiarity makes
them more predisposed to recommend it?
Zweig: Absolutely; no doubt about it. One of the oldest and
best-documented quirks in human psychology is something
called the halo effect, wherein if you rate one quality or aspect
of a person or thing, all your subsequent ratings of all the
other aspects will be colored by the first one.
So if, for example, you were to rate me on a scale of one to
five on how handsome I am, you can then later rate how intelligent
I am, how articulate I am, how wealthy I am, how positive I
am. All of those judgments will be skewed toward the initial judgment
of how handsome I am. And by the way, that’s true whether
your rating was high or low. So if you said, “Well, no, Jason isn’t
handsome at all,” then I wouldn’t be very articulate either and I
wouldn’t be very intelligent. If you said I’m very handsome, then
you would be much more inclined to rate my intelligence higher,
my overall presentation higher, all of those things.
One of the most amusing studies in this field comes from
high school teachers: Psychologists took an answer to an
actual essay question written by a real high school student
and made hundreds of photocopies of it, and distributed
them to real high school teachers with the student’s name
in the upper right-hand corner. In some cases the student
was named David, and in other cases he was named Hubert.
In some cases she was named Lisa, and in other cases she
was named Bertha. David and Lisa, on average, got grades 10
percent higher than Hubert or Bertha, because having a nice
name casts a halo over the quality of the work. And people
are totally unaware of this. They don’t realize that they’re
responding to a halo effect, but they are.
One thing that people who buy index funds can take a lot
of comfort in is that by definition, an index fund should not
be influenced by unconscious bias, and overall, that should be
a good thing over the long run.
JoI: What do you think are the most important advice or findings in
the book that investors should really focus on?
Zweig: If I had to boil it all down to one thing, it’s you need to be
more mindful as an investor. That means you need to keep better
records of your decisions; it means you need to be more introspective
and more retrospective. You have to look back at how
your decisions have worked in the past; you have to think more
carefully about the decisions you’re making in the present.
And I guess if I had to boil it all down to one rule, it would
be if the market is open, your wallet should be closed: If you
get the idea today, you should not actually do it until tomorrow.
Because if you sleep on it, you may wake up the next
morning and your mood may have changed, the data may
have changed, you may just see things in a different light.
It’s quite rare, unless you’re a short-term trader, for anything
significant to change overnight that would leave you worse
off, but you might well make a much better decision if you’d
just wait until the next day.
18
July/August 2008