“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
When I first started writing about active fund management for Sensible Investing TV five years ago, I generally found it generated two different responses from the UK investing industry — either people would ignore what I was saying, or they would ridicule it. Nowadays, at least people are more likely to debate the issues.
I am, however, resigned to the fact that many — in fact, possibly most — investment professionals will continue to believe (and genuinely so) that active management is superior to low-cost indexing. The reason, simply, is that their jobs depend on it.
There was a fascinating paper in the February issue of the Journal of Economic Psychology called Self-deception facilitates interpersonal persuasion. In it, the authors explain how we instinctively seek information that supports what we want to believe and avoid information that does not.
Their research involved an experiment in which participants were asked to write a speech about a character after watching a series of videos of him engaging in positive, neutral and negative actions.
Before watching the videos, they were each given a goal; specifically, each was told that they would have to persuade others to form either a positive, neutral, or negative opinion of the character. A financial reward was offered to those who wrote the most persuasively.
The researchers found that the participants proceeded to watch the videos in a biased way. So, for example, participants who had been instructed to write a positive speech lost interest in watching the rest of the videos when they first saw the character helping someone in need.
However, if their goal was to write a positive message and the first few videos showed the character behaving badly, they kept on watching until they saw him engage in positive behaviour; in other words, they held on until they saw what they wanted to see.
Interestingly, the impression they were asked to create also affected the judgements they formed about the character. For instance, those instructed to write positively about him really did see him in a more positive light.
More importantly, participants who let their goals influence their beliefs also created the most persuasive messages.
Interviewed by Scientific American, one of the authors, William von Hippel from the University of Queensland, said: “What’s so interesting is that we seem to intuitively understand that if we can get ourselves to believe something first, we’ll be more effective at getting others to believe it. So we process information in a biased fashion, we convince ourselves, and we convince others.”
Writing about the study in Psychology Today, Tim Cole, an associate professor at DePaul University, said:
“People are strange. We possess the ability to evaluate evidence and apply logic to solve complex problems.
“But logic and reason often take a backseat when deciding what we think and believe is true when misguided beliefs allow us to accomplish our goals.
“More often than not, we lead with our goals and desires, not the facts, then distort, overlook, and contort the evidence to fit.
“This study shows that goals can influence how we take in information, shape what we believe to be true, and help us get others to see the world as we do.”
As Upton Sinclair said, it’s difficult to persuade even the most intelligent people to accept the evidence if they’re financially incentivised to ignore it.
Read the full paper here:
ROBIN POWELL is a freelance journalist and the founding editor of The Evidence-Based Investor. Based in Birmingham, England, he founded Ember Television and Regis Media, and he specialties in helping disruptive financial firms to grow. He also campaigns for a fair, transparent and sustainable investing industry. You can follow him on Twitter at @RobinJPowell.