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Where wilful blindness reigns, fuzzy half-truths blossom

17th November, 2019

Published in the Sunday Times money section on 17th November 2019.

Applied  to vast swathes of human existence, ignorance is assuredly bliss. The alternative would be overwhelming despair about everything from Brexit and trade wars to climate change. The mental escape afforded by obliviousness works only in so far as it is unwitting. Wilful ignorance is another matter altogether. 

Sometimes, the best books on investing aren’t ostensibly about investment at all. Margaret Heffernan’s “Wilful Blindness” hits the mark with lessons aplenty for the would-be investor. 

It’s littered with examples of individuals and organisations taking massive risks – and making colossal blunders – by ignoring obvious dangers. The investment parallels are legion.

Dr. Alice Stewart

One of the most compelling stories in the book, tells the tale of physician Alice Stewart. In Oxford in the 1950s, Dr. Stewart was fascinated with the new science of epidemiology. She realised that the way to prove herself was to find a hard problem and solve it. The problem she chose was the rising incidence of childhood cancer. Most diseases correlate with poverty, but the childhood cancer of the time was affecting mainly affluent children. 

Dr. Stewart didn’t know what she was looking for, so asked every possible question. And amidst a mire of data, one thing shone like a beam. With the statistical precision most scientists could only dream of, by a ratio of 3 to 1, the children who had cancer were born to mothers who were x-rayed whilst pregnant.

That flew in the face of the conventional theory; X-rays were safe up to a point. It was a very inconvenient truth for doctors, who definitely wouldn’t put patients in harm’s way. And no practicing doctor, it turned out, wanted to hear it.

They carried on x-raying pregnant mothers for the next 25 years. It wasn’t until 1980 that the American Medical Organisation recommended that the practice be abandoned. 

The Triumph of Hope over Experience

The thing that binds so many of the stories and examples of wilful blindness in Heffernan’s book is hope, even in the face of contrary evidence. Investment markets present ideal conditions in which wilful blindness can flourish. Unlike physics, finance or economics is not a hard science. There are no immutable laws. And into that void of vagueness, fuzzy half-truths blossom.

Whether it’s the ongoing failure of people to fund properly for retirement, the persistent belief in market timing or continual willingness to hitch our wagons to some elusive investment star, we are constant fodder for investment snake oil. Hope frequently triumphs over experience in investment markets. 

The blindness to investment reality is currently manifest in the willingness of investors to suspend disbelief and invest in complex products with vague risks and the promise of high returns. These products which provide finance to a special purpose vehicle that in turn invests in energy projects or foreign property seems relatively uncontroversial on the surface. 8-10% annualised returns in a zero interest rate environment are not unheard of, but certainly don’t come without significant risks.

Investment Risk

The riskiest thing in investing is the belief in possibility of return without risk. According to famed debt investor Howard Marks, there are two main risks in the investment world; (a) the risk of losing money and (b) the risk of missing opportunity. You can completely avoid one or the other, or you can compromise between the two, but you can't eliminate both. At various points in the cycle, the emphasis tends to be on one or the other but balancing the two is the key. These products are not destined to disappoint, but the investor emphasis seems to have swung in the missed opportunity direction and choices are being made that would look silly, in a more normal interest rate environment. 

That’s not to say there aren’t head-scratching things going on in other areas of financial markets. But whilst it’s okay to invest, lose money and understand why, it’s unforgivable to invest, lose money and be oblivious to the risks (wilfully or otherwise). 

A very interesting aside to Alice Stewart’s story reveals how she knew she was right. She had a collaborator, a statistician named George Kneale. His job was to prove that Dr. Stewart was wrong. He actively tried to find ways of crunching the data that would create conflicts around her concepts. What gave her the confidence that she was right was that he couldn’t poke any holes in her theory.

How many investors have such collaborators? Many of us wander around in a haze of distortion and confirmation bias, that it is good to be beaten to attention every now and again. 

The smarter you are, the more likely you are to think you are immune to biases of decision making. If you are serious about investing, find someone to try to prove you wrong, or at least poke holes in your approach. Ignorance may be bliss, but in investment markets, it’s also costly.

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