How even facts can mislead you with money
Economist Alex Edmans explains how how our biases are exploited and what we can do about it.
What you should remember from this episode
Alex Edmans is a professor, author and speaker. He's a smart cookie.
He says information can be completely true but still be misleading. Imagine an older generation that made its money through property saying that's how you build wealth - but the landscape has changed since then.
One of the problems we face, as humans, is we like to extrapolate from small bits of data. Take a friend who made money from crypto. Does that mean crypto is a great thing to invest in or did your friend get lucky?
We generally interpret data and information based on what we want to hear (are we pro or anti crypto?) and then shape or argue with the facts to support our perspective.
If we see something that confirms our viewpoint, it releases dopamine. This is how echo chambers form.
It’s like the jury only seeing one side of a case, the prosecution. You need to see both sides.
To validate something, look at the type of evidence (the quality) and the scale of evidence.
Alex says the '10,000 hours' principle evangelised by Malcolm Gladwell doesn’t stand up to scrutiny. He started to teach it to students because it was accepted wisdom. But he then studied the book carefully and saw that the evidence didn’t support Gladwell's argument. There was no mention of 10,000 hours in the underlying study and the study was actually based on just violinists which Gladwell extrapolated out from - and created a massive accepted myth.
Alex says we won’t be able to achieve 100% certainty with many decisions, especially around money, but we are looking for strong evidence, ideally beyond reasonable doubt.
Remember, if you want something to be true you’re more likely to have your biases at play.
When you come across views you disagree with, it feels like being attacked at an evolutionary level.
This is why it can be useful to imagine the opposite view to yours. You will be able to come up with some valid arguments (and probably be able to find data supporting it).
Unfortunately, you can always often find some data to support your view by being selective with the data you look at.
To conclude, tune into your natural reactions to views - and respond accordingly.
