Cognitive Bias of Pundits: A Challenge for Barry

A Dash of Insight is a blog about a book.  We are writing "Misguided Gloom" one page at a time.

One of the themes is that prominent market pundits, despite their familiarity with behavioral finance, are subject to the same cognitive biases as individual investors.  At "A Dash" we do not think we are smarter than everyone else.  We do believe that knowledge of research methods, how the government develops reports, and an unbiased view toward data gives us an edge.  Our expertise comes from figuring out who is "all hat and no cattle" and who really has evidence and argument.

A problem in this exercise is that some pundits are good debaters.  They quickly find some argument that has a superficial plausibility (e.g. The government is manipulating the data) which resonates with many active traders, most of whom did not take a course in  political science or quickly forgot it!  The average person’s knowledge of government is basically zilch, which is why they know more about The Three Stooges than the three branches.

Any investor or trader who is more sophisticated in the understanding of government organization, the institution of the Fed, how research is conducted, and what to expect from data has a real market edge.

With this background in mind, I read with some astonishment a recent post by Barry Ritholtz.   Barry claims that since he knows about cognitive bias, he is beyond this problem.  He writes as follows:

My saving grace is that I at least recognize these biases, which
gives me a fighting chance to see reality without all these filters.
That’s why I am so keen on looking past the headline data and taking
apart the details beneath.

I find this amazing since Barry does not really do what he says.  My impression of his analysis is that he posts, uncritically, any link that supports his bearish view.  He attempts to tear apart any number that conflicts with this view.  This is an empirical question.  One could look at his blog and analyze the posts to see if my impression is correct.  If my staff has time, we might do this.  Barry could also do this in his forthcoming year-end analysis.

I want to be perfectly clear in setting this forth.  I respect Barry and I am delighted at his success in building a blog that gets major attention and getting media coverage.  He is approaching many problems in the right way.  I just think he is reaching the wrong conclusions.  The popularity of his blog, as well as the attention to Roubini, and other bears like Doug Kass is part of the current climate of negativity.

This is a simple challenge.  One merely needs to classify the posts dealing with data from The Big Picture.  The posts either deal with positive data on the market or negative data.  That is one axis.  The second axis is whether Barry just posted it for boo-yah’s or did his trademark analysis of the numbers.  We can even test whether the difference is statistically significant.

The result should be interesting.

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  • Barry Ritholtz December 19, 2006  

    You overstate the case.
    I claim only this simple observation: Since I am at least aware of this problem of bias and selective perception, I have some small ability to deal with it. Not total or infallible capability, just a small recognition of this issue.
    None of us are beyond the limitations of our own wetware — and those of us that are totally unaware of these inherent flaws, are unknowing slaves to them.

  • Bill a.k.a. NO DooDahs! December 21, 2006  

    Definitely there is rampant bearishness in punditry and in the blogosphere. The retail investor is not involved, and perhaps capitulated during the mid-year lows; hedge funds are not fully involved in equities; the Naz and the Trannies are not confirming; all of this builds a classic “wall of worry” for the markets to climb.
    It is a good time to be on the right side of the market.