by Erik L. Knutzen, CFA, CAIA, Chief Investment OfficerâMulti-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 âsummer reading blog,â weâve covered the importance of remembering the big picture, the power of unconventional thinking and the advantages of âfactful optimism.â 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 didnât think weâd 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 Donât 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. Itâs 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 âthink againâ and âunlearnâ is less valued, but just as critical.
Itâs a difficult skill to cultivate, Grant acknowledges, because it demands a counterintuitive âjoy in being wrong.â He contrasts the ârethinking cycleâ (humility-doubt-curiosity-discovery-humility) with the âoverconfidence cycleâ (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 thinkingâthe 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 doesnât simply observe that reducing everything to âright or wrongâ 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 âon the one hand this, on the other hand thatâ debates.
This plays into our trained assumption that the ability to simplify a challenging or complex issue denotes mastery of itâregardless 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, itâs 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 beliefsâin 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.
âA dose of complexity can disrupt overconfidence cycles and spur rethinking cycles,â Grant writes. The real world isnât neatly sorted into for and againstâand we think much more clearly and open-mindedly when we recognize that.
Embrace Rethinking
Investors can start to embrace rethinking in a couple of ways.
First, itâs 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 âplaybookâ for the crisis, but we also kept the project under constant iteration, taking extra pains to âclarify what we would need to see to make us change our base case.â
We knew our playbook could be wrongâin 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, itâs good to remember that breaking questions down into for and against, âin this case, in that case,â 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 doesnât support them. But itâs also about reframing our questions. How might our investment thinking change if, instead of asking whether current inflation is âtransitoryâ or âstructural,â we recognize that itâs likely to be both, and start considering the nuances behind that artificially binary question?
Grounded
Above all, as Grant writes, the rethinking mindset and skillset is about humility.
He likes to point out the Latin etymology of that word: âof the earthâ or âgrounded.â In the immediate sense, that means ânot getting above yourselfâ in overconfidence. But it also suggests ensuring your decisions are âgroundedâ 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 Grantâs 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, refreshâand rethink.
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