by Erik L. Knutzen, CFA, CAIA, Chief Investment Officer—Multi-Asset Class, Neuberger Berman
As those of us in the north pack for summer vacations, here is my regular recommendation of a book to squeeze into your suitcase.
In previous years of my annual “summer reading blog,” we’ve covered the importance of remembering the big picture, the power of unconventional thinking and the advantages of “factful optimism.” Last year, as the pandemic made us reflect upon themes of resilience, forward planning and strategic redundancy in our systems and portfolios, I confess I didn’t think we’d still be facing global travel restrictions 12 months later.
This reminder of the continued uncertainty that surrounds us is why my recommendation this summer is Think Again: The Power of Knowing What You Don’t Know, by the organizational psychologist Adam Grant.
As the subtitle suggests, this book is about humility as an improved mindset for analysis and decision-making. It’s also about a skillset: training yourself to favor complexity over binary thinking and embrace the messy nuance of reality. It contains valuable insights for living, working and investing in a world that changes so rapidly that we constantly need to update our thinking to keep up.
The Joy in Being Wrong
Grant argues that, while the ability to think intelligently is important, the ability to “think again” and “unlearn” is less valued, but just as critical.
It’s a difficult skill to cultivate, Grant acknowledges, because it demands a counterintuitive “joy in being wrong.” He contrasts the “rethinking cycle” (humility-doubt-curiosity-discovery-humility) with the “overconfidence cycle” (pride-conviction-bias-validation-pride) and reminds that it is the humble mindset that makes human beings so creative, by seeking out facts and keeping up to date with the latest information, and by taking more interest in data or ideas that challenge or falsify its beliefs than those which confirm them.
For Grant, this is the surest way truly to confirm our beliefs, or to move from being wrong to being right.
A Dose of Complexity
How do we get into this mindset?
One intriguing insight from Think Again concerns the problem of polarized thinking—the notion that there are distinct pros and cons of a course of action, or distinct arguments for and against an idea or point of view.
Grant doesn’t simply observe that reducing everything to “right or wrong” causes us to cling unmovably to beliefs or decisions. He also notes that we often fall into that trap even when we are given quite nuanced and detailed factual information. The reason is that this information is so often presented all-too-neatly, as “on the one hand this, on the other hand that” debates.
This plays into our trained assumption that the ability to simplify a challenging or complex issue denotes mastery of it—regardless of whether there is any real simplicity or clarity on offer. More damagingly, in our view, it also plays to our confirmation biases: when for and against are conveniently filtered out for us, it’s too easy to pick one side and ignore the other.
By contrast, Grant describes an experiment in which participants with apparently polarized political affiliations were able to reach consensus on a contentious issue. Breakthrough came by showing them arguments concerning another, equally contentious issue, via examples of real people with nuanced beliefs—in this case, they saw passionate gun-rights advocates strongly supporting universal background checks, and defenders of the Second Amendment who favored tighter gun control.
Similarly, we are often better able to rethink our beliefs when others help us to explore the underlying nuances of those beliefs collaboratively, with questions, rather than bombarding us with facts or persuasive debating points.
“A dose of complexity can disrupt overconfidence cycles and spur rethinking cycles,” Grant writes. The real world isn’t neatly sorted into for and against—and we think much more clearly and open-mindedly when we recognize that.
Investors can start to embrace rethinking in a couple of ways.
First, it’s good to recognize not only the need to change your mind when the facts change, but the need to change your mind much more often when facts change much more rapidly. Numerous studies suggest that the most successful forecasters are those who get into the habit of updating their forecasts whenever new information becomes available.
Last year, when the pandemic struck, we quickly drew a range of scenarios and an investment “playbook” for the crisis, but we also kept the project under constant iteration, taking extra pains to “clarify what we would need to see to make us change our base case.”
We knew our playbook could be wrong—in fact, we assumed it would be wrong within a few weeks or months. We learned useful lessons, not only for the pandemic environment, but for a world in which technological advancements are racing, fiscal and monetary policy is in unmapped territory, and modern communications spread disruptive ideas further and faster than ever before.
Second, it’s good to remember that breaking questions down into for and against, “in this case, in that case,” encourages confirmation bias and binary thinking, rather than nuanced consideration.
This is about preventing our pre-existing convictions from making us selectively blind to new data that doesn’t support them. But it’s also about reframing our questions. How might our investment thinking change if, instead of asking whether current inflation is “transitory” or “structural,” we recognize that it’s likely to be both, and start considering the nuances behind that artificially binary question?
Above all, as Grant writes, the rethinking mindset and skillset is about humility.
He likes to point out the Latin etymology of that word: “of the earth” or “grounded.” In the immediate sense, that means “not getting above yourself” in overconfidence. But it also suggests ensuring your decisions are “grounded” in facts, and that your facts are up to date; and retaining a sense of the messy reality at ground level alongside the necessary simplifications of the view from 40,000 feet.
I commend Grant’s book for your vacation reading: I believe it will resonate as you seek the opportunity to relax for a moment in this strange, altered environment, which has forced many of us to reconsider once-simple assumptions. Most of all, I hope you get time to change your scenery, find some physical and mental space, refresh—and rethink.
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