personal investment blog

Four kinds of bias

Four kinds of bias

30 May 2016


It is not news to say that people will select facts and opinions that appear to favour their side of an argument. There was a good example last week from the pro-Remain CBI which wants to demonstrate that the possibility of Brexit is already hurting investment.

“Overall, surveys of investment intentions have shown a deterioration in investment plans, particularly in the services sector. Some of this is likely to be related to uncertainty ahead of the EU referendum. Although our April investment intentions data for the manufacturing industry actually strengthened, anecdote from the sector suggests some specific factors at play – in particular, replacement spending in the food & drink sector (following flood-related damage earlier in the year) and buildings investment by chemicals manufacturers looking to expand production on the back of solid export demand.”

CBI Economic Forecast 16th May 2016

Did you get that? The latest data suggest that their view is wrong so they have concluded that the data are wrong. The CBI is supposedly a highly respectable organisation (so respectable that the EC contributes money to fund some of its publications) and can get away with substituting anecdote for data, or so it seems.   

The Leave side is mostly less respectable and, partly by virtue of the necessity that it is promoting something of a leap in the dark, rarely seems to attempt to employ hard facts. But you can be sure that it is highly selective in what it says. You would imagine that the UK is full of people who are deeply worried about immigration.

According to a survey that goes back to 1962, the peak year for UK citizens thinking that there are too many immigrants was 1970 when the level reached 89%. In 2014 it was 54%.

Immigrant views

Enoch Powell’s infamous “rivers of blood” speech was made in 1968 and probably contributed to the high level of antipathy to immigration that the chart shows. During the speech, Powell quoted a white constituent (in Wolverhampton) as saying:

“In this country in 15 or 20 years’ time the black man will have the whip hand over the white man.”

As it happened, the period covered by that forecast is infamous for race riots in Brixton and elsewhere. These did not feature white people rioting because they thought that black people held the “whip hand” over them. Though according to The Clash in 1977, some white people would have liked an excuse.

“Black people gotta lotta problems

But they don’t mind throwing a brick

White people go to school

Where they teach you how to be thick

An’ everybody’s doing

Just what they’re told to

An’ nobody wants

To go to jail!

 White riot – I wanna riot

White riot – a riot of my own”

Powell and others seem to have succeeded in worrying the UK public to an extent that now seems ridiculous. It is sad that both Remain and Leave are now trying to frighten people (over the economy and immigration respectively) to make their case. No one using those tactics is going to offer a balanced view.


The late Bernard Levin invented the phrase Single Issue Fanatics (SIFs). His first target was Welsh language “activists” who at the time (1990) probably seemed eccentric and destined to remain marginal for eternity. But the SIFs are mainstream now. On one morning last week there was news of support for fracking in Yorkshire and for the legitimisation of GM crops in Europe. Both of these issues are wholly opposed by vocal and probably well-funded lobbyists who have no interest in discussion. Groucho Marx nailed their attitude in Horse Feathers, a mere 84 years ago.

I don’t know what they have to say,

It makes no difference anyway

Whatever it is, I’m against it!

No matter what it is

Or who commenced it

I’m against it!


Your proposition may be good

But let’s have one thing understood

Whatever it is, I’m against it!

And even when you’ve changed it

Or condensed it

I’m against it!

 SIFs are more hard-line that those who merely spin facts selectively. SIFs will say that up is down or black is white because the truth is an expendable foot soldier in the war that their issue represents.


A more interesting problem is when people making a case don’t realise that they are using selective arguments.

In 2004, James Surowiecki published The Wisdom of Crowds. It made a case for the collected wisdom of individuals over the opinions of acknowledged experts who tend to suffer from the mutually endorsed prejudice of a closed group.

I cited this book in a post in August 2013 called “The dangerous comfort of crowds”.

Boards of executives and non-executives often seem to suffer from closed-group confirmation bias. How else does one explain the fact that most takeover bids made by public companies destroy value for shareholders? Large mergers are high risk at the best of times. A unanimous vote at a board meeting is often a dangerous signal that dissenting voices have been squeezed out.

On 14 September 2007 we all watched customers of Northern Rock queueing outside branches to withdraw their savings. The bank was receiving emergency support from the UK government. Three days later the Dutch Ministry of Finance cleared the RBS bid for ABN Amro. By 26th October 95% of ABN Amro shareholders had accepted the offer, probably unable to believe their luck.

We know what happened next but what is baffling is how the Board of RBS could have pressed on with the transaction as the financial storm clouds gathered. They must have been blind to anything that contracted the extraordinary, nearly mad opinion that this was a good time to bet the bank on an act of priapic empire building.

Within some closed groups, encouraging faith that is not really supported by evidence is a positive thing. It is the basis of many sporting triumphs. Witness Leicester City winning the Premier League, an outcome that was famously priced at a probability of 5000-1. Team spirit may well be a necessary but not sufficient factor in sporting success. It is not guaranteed to make average footballers play like stars. 

And for every Leicester City there are any number of football clubs that have spent heavily on new players and a new stadium on the assumption that their continued place in the Premier League was somehow guaranteed. It’s certainly what the supporters would have wanted. But every year 15% of the teams in the Premier League are relegated and insolvency and administration beckons for those who have not provisioned for this disaster.


Spinning facts subconsciously to confirm a personal prejudice is all too easy and potentially much more sinister.

Many people will come across this in their personal lives when they romanticise an individual to whom they have given their heart. Most of the time we make a bit of a fool of ourselves, realise that the object of our affection is not the sweetest wine imaginable but is in fact a Vin de Table with a screw top and come to our senses.  

In extremely unfortunate cases our mistake will result in permanent damage to body, mental health or bank account or all three.

People who are wrong about something are usually wrong about being wrong. To put it another way, can you think something and also observe yourself at a distance doing the thinking? That is effectively what you must do to catch your own confirmation bias in action.

I have a portfolio of around 70 shares. It’s probably too many but it’s my hobby as well as my financial future. Some of these companies I have grown to dislike but I hold on to them for technical reasons such as my reluctance to pay capital gains tax. Disliking companies is actually much more comfortable than loving them. When I dug myself into a deep hole with Taylor Wimpey (worth a read although I say it myself), I and everyone else hated the company but I still found it easy to judge whether the market was being irrationally bearish. (It was).

The late Barton Biggs used to say that “the stock doesn’t know that you own it” but it can be tough not to feel personally involved with your favourite ideas.

I was relieved when Sainsbury bought Home Retail Group because I was convinced that I had seen value in the reserve online-and-collect model at Argos that others didn’t understand. I used to appreciate the strong free cash flow of the Home Retail Group. For the last three years this free cash flow has disappeared, partly because capex has soared because they were investing heavily in the business model that I admired. So I forgave the fact that free cash flow used to be above £200 million for year after year but was now zero. I suppose it was OK but I sure wanted it to be OK.

I am now irrationally keen on William Morrison. I never shop there because there aren’t any Morrisons stores near to where I live. I accept that large food store chains compete hard to win marginal gains in market share. In the long term, a consistent trend will have an effect on the health of the business. In the short term a number of factors could be at work and experts can analyse them to their hearts’ content. (It is worth considering that supermarkets probably don’t mind “price war” stories – it is in their interests that regulators and customers see the market as competitive).

I like Morrisons because it is financially sound compared to its larger rivals. It generates decent cash flow and has not sold off its real estate for short term gain at the cost of substantial long term lease obligations. I want this to be the factor that makes Morrisons a profitable investment. I am inclined to forgive Morrisons when it makes mistakes selling groceries, even though it exists to sell groceries.

I hope that by trying to catch my own confirmation bias I will mitigate its potential negative influence on my wealth. But it’s not easy and frequent failure is absolutely guaranteed.

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