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Prove me wrong

Prove me wrong

Posted on: June 02, 2015
Author: Cory Boddy, CFA, CFP, Director and Investment Counselor

For Christmas, my father-in-law gave me a chess set along with a beginner’s guide to chess. Was he trying to tell me something? Regardless, I happily accepted the challenge.

For many, chess isn’t simply a game. Countless books have been written on chess, its grandmasters, and the life and business lessons it teaches us. It’s commonly assumed that an essential element of chess mastery is rapid calculations, and that the best chess players quickly consider many more possible outcomes than novices can. While this may be true, new research suggests that what makes a larger contribution to chess success is falsification1.

Falsification is the ability to prove an idea or theory wrong—in particular, our own ideas and theories. Most of us are quite bad at this, as we don’t naturally look for evidence that contradicts our views. Instead, we look for data that proves we’re right, a tendency known as confirmation bias. The willingness and ability to overcome this bias turns out to be a crucial element in chess success. It is also a key to investment success.

A challenge we all face as investors is that in a world of constant news on demand we are often driven to react. We want to run with bulls and flee with the bears, and feel the urge to load up on risky investments when times are good, only to become overly cautious when markets decline. Even if we pride ourselves in being smart enough to see through this cycle that eats away at most investors’ returns, and take advantage of it, we run the risk of mishandling the opportunity if we aren’t willing to falsify our ideas. For example, if stock XYZ is clearly a bargain at this low price, who is the fool on the other side of the transaction that is happy to sell?

To prevail at chess, you need to respect the fact that your opponent is likely not a fool. You also need to resist the temptation to pursue an immediately attractive move, as it often leads to trouble down the road. It’s uncomfortable to focus intensely on what you don’t see, but if you want to improve your chess game, you have to find your mistakes before your opponent does.

Fortunately, we have tools to assist us in falsification. One tool is to force yourself to take the opposite side of the argument. You can do this by employing a technique called the pre-mortem, where you place yourself in the future, after you’ve made the decision, and that decision turns out to be wrong. Then you write the obituary for your idea and explain what went wrong. Another tool is to spend more time with people who might disagree with you (maybe that means calling your investment counselor!) We all have our own biases and blind spots. The goal is to prevent these from leading to investment mistakes.

In the end, if you’re not convinced we can become grandmasters of falsification and learn to overcome our biases, you’re not alone. After all, the world’s foremost expert on this topic, Daniel Kahneman, isn’t convinced either2.

But unlike chess, when it comes to investing you’re rarely forced to move. In fact, the best investment move is often to do nothing and stay the course. Now go ahead and try to prove me wrong.


This article was first published in Navigate, an ATB Investor Services publication that provides valuable insights for wealthy and institutional investors. To read the full issue, click here.

1Tough, P. (2013). How Children Succeed: Grit, Curiosity, and the Hidden Power of Character. Old Saybrook: Tantor Media, Inc.

2Kahneman, D. (2011). Thinking, Fast and Slow. New York. Farrar, Straus and Giroux

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