Wednesday, April 27, 2011

Overconfidence & Being Wrong

In Marty Babits wrote:
"Have you ever had the experience of feeling you were absolutely right about something and then realized that you were mistaken about that very thing of which you were so sure?.....Being wrong is disconcerting. It is one of the few, and therefore precious routes, that lead us to putting our capacity for humility on line. And humility is a precondition for empathy. Learning from mistakes is not simply about the acquisition of new and better understandings, it also pays off in hard-won knowledge about the self. Lack of this knowledge is not always a character flaw. It is often a sign of underdevelopment; evidence that the self is a stranger to key aspects of its nature."

A Ted Talks video by Kathryn Shults is about "Being Wrong"

Kathryn Shults explains, "This internal sense of rightness that we all experience so often is not a reliable guide to what is actually going on in the external world. And when we act like it is, we stop entertaining the possibility that we could be wrong..."

According to my kids "I always think I'm right". So maybe I'm deflecting criticism here, but I would like to build a case where you can be right and you can still be wrong. Obviously, I want to learn by my mistakes and improve. Isn't there still a whole universe of circumstances where it isn't that you did something wrong?

1) being early to a trade is wrong.
2) being front-run by a program or algorithm can make your trade wrong.
3) flash-crashes can kick you out of a stop, even if your underlying assumptions were correct.
4) being right and the rest of the world wrong, still makes your trade wrong.
5) trends and momentum stocks are "usually right until they are wrong", even if the fundamentals are wrong.
6) both bull & bear markets overreact.
7) Can't things be right today and then wrong tomorrow?

Let me think of ways towards being less wrong; Have curiosity,  do extra research, be doubtful, be contrarian, be skeptical. Be aware that circumstances can change.  In the end we should take the risk of being wrong and live by the Russian proverb, "Trust but Verify."
Right or wrong, it forces us to realize that we need to continually re-think things and that overconfidence is deadly.

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