Home > Uncategorized > The Future of the Economy and the Confirmation Bias

The Future of the Economy and the Confirmation Bias

Every day, you can read an opinion somewhere, validating your own regarding the economy.  Charles Hugh Smith writes convincingly about investing and the confirmation bias:

http://bit.ly/uIdmFE

“The vast majority of commentators implicitly express an emotional attachment to the USD. Establishing an emotional bond with a trade is an excellent way to lose your capital. As the trading saying goes: marry your spouse, not your trades. The reason is that once you have formed a love/hate attachment to a trade, then you are willfully blind to any indications that your position might be “wrong” in the sense of being a losing trade.

This is called “confirmation bias,” seeking out information which supports your pre-selected point of view, and ignoring evidence to the contrary. All such biases describe the effects of emotions on the key trading decisions, i.e. form an opinion about future price and then open, close or add to a position.”

You’ll see this “confirmation bias” all over the place – whether someone is discussing investing in precious metals or the stock market. Some believe the end is near for fiat currencies (nearer every day) while others claim Eurogeddon is nigh. The economy is crashing. The economy is recovering. It’s a recession, a depression a recovery. End the FED. Print more money. Stop borrowing. On and on it goes. Some days it there are more opinions than pundits offering them. Like Harry Truman we wish for the one-handed economist so he won’t say, “…on the one hand…on the other hand…”.

We all have a bias. Unfortunately, that bias can easily trip us up. For example, the wisdom that all fiat currencies eventually fall to zero seems as obvious as death and taxes. However, in the short-to-medium-term the U.S. Dollar could easily move higher. The USD Index currently stands at $79.61. Yes, the dollar has lost most of its value since the FED came into existence in 1913, but the dollar isn’t worth zero yet. Will it be? Someday. Is it yet? No.

Some people advocate buying physical silver and gold as a hedge against inflation, deflation, economic collapse, as an alternate currency, etc. They may just be right. The situation in Europe is grave. Governments around the world and their people have sky high levels of debt. Money printing could well lead to inflation or even hyperinflation. Still others point to signs of deflation. Gold and silver have been in a bull market for over a decade. Will it continue? There is a good chance it will. Things could change. If governments finally act responsibly, let debt clear from the system, and begin to allow the true cost of borrowing money to be reflected in the interest rate, then the price of gold and silver could well decline.

All of this speculation doesn’t even take into consideration other unpredictable things where biases enter in. Will the price of oil continue to rise? Will more wars break out? What about another world war? Could some unforeseen financial crisis occur that throws a monkey wrench into everything? The answer to all of these questions might well be yes.

Life is unpredictable. Our past experiences and beliefs influence and color our opinion of present events. We make decisions based on incomplete information and the “confirmation bias” is often used to fill in the blanks. This can be very dangerous. I have certainly paid a financial price for making investment decisions based on incomplete information and preconceptions. In the end, events are subject to interpretation. I certainly have my beliefs about what the future will hold. I make decisions based on those beliefs. At the same time, I am open to the possibility that I may be incorrect. There may be something I have missed. It’s important to seek out information that runs counter to the sources you usually consume and to your own beliefs. That doesn’t mean to change your opinion at the drop of the hat. It does mean, be aware of your own biases and don’t let them blind you to the possibility that the situation may have changed.

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