Your Brain's Fast Answer Feels Right and Is Often Wrong
Investors fight lazy thinking by seeking out people who hold the opposite view.
In Good Company with Nicolai Tangen · Friday Wrap-Up: Inside Active Strategies and Learning from Bill AckmanTry this, as Daniel Balthasar, a co-chief investment officer for active strategies at Norway's sovereign wealth fund, puts it: "A bat and a ball cost $1.10. The bat is $1 more than the ball. How much does the ball cost?"
If you said 10 cents, you are in good company. Most people do. The correct solution is five cents.
That gap is the point he wants investors to understand. He points to the late author Daniel Kahneman and his book Thinking Fast and Slow. The brain, Kahneman argued, has a fast system and a slow system.
The fast system runs almost all the time and answers automatically, including on analytical problems. The slow system does the careful reasoning, but it is a little lazy and has to be deliberately switched on. Ten cents feels obvious, so the fast brain blurts it out. Call on the slow brain to check the math, and five cents becomes clear: a $1.05 bat is $1 more than a 5-cent ball, and together they make $1.10.
The same habit affects investors. People do not like to hear they are wrong, Balthasar says, and their brains make it easy to avoid the discomfort by accepting the first comfortable answer.
That is why investor Bill Ackman has a rule Balthasar admires. When Ackman is building confidence in a stock, he goes to meet the biggest short seller, someone betting the stock will fall and who has the strongest reason to disagree with him. He also looks for news that cuts against his own case.
He says the fund needs to do better at challenging its own theses and is developing systems to help. The goal is to surface counterarguments, challenge its own views, and admit when it is wrong. As he puts it, "And I think the objective should be to find the truth."
Questions people ask
Why is five cents the right answer?
If the ball costs five cents, the bat costs $1 more, or $1.05. Add them together and you get $1.10. If the ball cost 10 cents, the bat would cost $1.10, and the total would be $1.20, which is too much.
What do psychologists mean by fast and slow thinking?
Fast thinking is automatic, effortless, and intuitive, like recognizing a face or answering two plus two. Slow thinking is deliberate, effortful, and logical, like doing long division or checking a complex argument. Kahneman argued we overuse the fast system because the slow one takes work.
Why would an investor meet a short seller?
A short seller profits when a stock falls, so they have done the work to find what could go wrong with a company. For an investor who owns the stock and profits when it rises, that person is the toughest critic. Hearing the bear case early can reveal a flaw before it costs money.