Money Sundays: On Hindsight Bias, Misremembering, and Why You Should Keep An Investing Journal

This post is VERY off-topic, even for a Money Sundays post. However, it is relevant to the often typical arrogance of experts, policy makers and elites at all levels and in all domains in our society. Feel free to skip it if you'd like.
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Once an event has passed, we tend to believe that we had better knowledge of the outcome before the fact than we really did.
--Michael Mauboussin, More Than You Know

Readers, do any of you remember the name Robert Citron? To municipal bond investors and anyone from southern California, his name is impossible to forget. Citron was the former Treasurer of Orange County, CA and he's (in)famous for singlehandedly blowing up that county's finances.

Citron used residents' tax dollars to speculate in a highly leveraged portfolio of repos and floating rate notes, and his speculations drove the entire county into bankruptcy in 1994. At the time, it was the biggest municipal bankruptcy in US history.

I want to share two quotes from Mr. Citron, both made publicly, shortly before he bankrupted Orange County. First, a quote from his annual report from September 1993:

"We will have level if not lower interest rates through this decade. Certainly, there's nothing in the horizon that would indicate that we will have rising interest rates for a minimum of three years."

In February 1994, just five months later, the Federal Reserve raised rates, exactly what Citron did not expect. But here's what our buddy Citron said immediately afterward:

"The recent increase in rates was not a surprise to us; we expected it and we were prepared for it."

Okay. It is duplicitous enough to act like you "know" where interest rates are going--only charlatans claim this. But it's far worse to misremember what you said so it sounds like you were right when you were wrong all along.

Worst of all, it's astounding to see Citron misremember what he wrote publicly just months before in his County annual report, especially given that he was running a risky, interest rate-sensitive exotic bond porfolio! The arrogance here is staggering.

This is a classic example of hindsight bias. It's a common cognitive error that we all make: we conflate what we know after an unexpected event happens with what we knew before. In Citron's case, he misremembers his own expectations, which allows him, hilariously, to claim he knew all along that interest rates would increase.

Fortunately for us, we had his original prediction in print, so we know what he actually expected, and we can see that he misremembered his prediction. We had his original prediction in print. Hang on to that thought: we'll return to it shortly.

Within a few months, Citron's exotic bond portfolio--a deeply risky portfolio he had no business running at all, and certainly not with taxpayer funds--blew up. It spontaneously put the entire county into bankrupcty. Thanks to Citron's arrogance and hindsight bias, 3,000 public employees lost their jobs and the county cut budgets across all services for years to come.

Worst of all, county taxpayers are still holding the bag: they get to make extra tax payments of some $76 million per year until 2027.

So, why am I talking about this? Because in personal finance, we are all mini-Robert Citrons. We are all consistently guilty of hindsight bias. It's one of the most common cognitive errors in investing.

Granted, in our personal investing, we can't detonate entire municipalities. Thank goodness. But we can and do hurt ourselves and our families when we make prediction errors, misremember those predictions, and then fail to learn from them.

So how do we avoid overconfident decision-making, and how do we make sure that we learn from our investing mistakes rather than misremember them? How do we protect ourselves from our inner Robert Citron?

The solution is laughably easy: keep an investment journal. And use it to document the reasons behind any investment action you take.

Here's how I do it: I use a simple spiral notebook, and whenever I buy or sell a stock, index fund, ETF, or make any changes to my overall investment portfolio, I simply write down four or five bullet points on what I intend to do and why.

And when I buy any individual stock, I make sure I write a short two- or three-sentence thesis on why I want to own the company, what it does, and, most importantly, at what prices I would buy more.

One more idea: you can use your investing notebook to keep a running list of stocks, funds or ETFs that catch your eye and that might be worthy of buying under the right conditions (and yes, of course, you'll jot down 2-3 sentences on what those specific conditions would be so that later you don't misremember them!). This is a convenient way to keep a stable of potential new investment ideas.

The whole point of keeping an investing journal is to subvert hindsight bias. Your brain has a subtle but powerful desire to conflate prior predictions with new information. It wants that wonderful feeling that it knew all along. Writing down your thinking at the time of prediction preserves it, inoculating it from misremembrance.

You'll see: in the future, there will be some disruption--affecting a stock you own, a fund you've chosen or the overall investment environment--and that disruption will impact your thinking and cause it to become unmoored. At these moments, it's priceless to be able to bring yourself back to the actual documented reasons why you bought a stock or a fund. With properly moored thinking, you can actually check to see if your thesis was correct or incorrect and why. You'll be able to learn from your mistakes rather than misremember them. And you'll have a concrete plan for what you should do when an exogenous event or an unexpected market selloff occurs.

In contrast, if you merely keep your reasons in your head, you are guaranteed to misremember them. What's worse, the key problem with hindsight bias and misremembering--as with most cognitive errors--is that we really, truly, honestly believe we don't do it. We are all mini-Robert Citrons. An investing journal is just a simple device to help protect us from ourselves.

Remember Robert Citron. Note your investment decisions and the thinking behind them in your investing notebook so you won't do what he did.

Some of the ideas in this post came from Michael Mauboussin's book More Than You Know, Hersh Shefrin's book Beyond Greed and Fear, and Nicholas Taleb's book Antifragile. For further reading on Orange Country's bankruptcy see Robert Citron's Wikipedia page for useful additional context.

Read Next: Money Sundays: Is Looking For Tax-Efficient Investments Icky? Or Intelligent?





How can I support Casual Kitchen?
Easy. Do all your shopping at Amazon.com via the links on this site! You can also link to me or subscribe to my RSS feed. Finally, consider sharing this article, or any other article you particularly enjoyed here, to Facebook, Twitter (follow me @danielckoontz!) or to bookmarking sites like reddit, digg or stumbleupon. I'm deeply grateful to my readers for their ongoing support.

CK Links--Friday November 21, 2014

Links from around the internet. As always, I welcome your thoughts.

PS: Follow me on Twitter!

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Recipes:
So damn addictive, this Cranberry Orange Pecan Bread. (Alosha's Kitchen)

You hardly even need a recipe for this: Roasted Cauliflower. (Diary of a Locavore)

An easy Anglo-Indian Beef Stir Fry, plus some great tips on tenderizing super lean beef.
(Food on the Food)

Articles:
"I wanted to have a perfect body, but that’s not the case. And that's okay. Loose skin and all, I'm happy with where I've come from and where I am at now." (Huffington Post)

Related: What no one tells you about dramatic weight loss. (The Cut)

With GMOs, how can so many smart people be so sure that there's nothing to worry about? (Bloomberg)

More evidence that food miles have almost nothing to do with the carbon footprint of your food. (Farming Futures)

Related: Help the world by NOT going local and A Paradox for Locavores.

Whoops! Unilever inadvertently gives a small "mayo" maker a lot of free publicity. (Eat Drink Politics)

Another perspective on "Mayo-gate": Sometimes it's hard to know when consumer protection becomes protectionism. (Jayson Lusk)

Do you ever hear shark music? (Owlhaven)

I used to think that our genes are something we can't change. Imagine my surprise when I happened across a study which showed the opposite.
(Stonesoup)

Westminster, Massachussetts attempts to pass a full-blown ban on the sale of all tobacco products. The town's reaction was… unexpected. (New York Times)

The shirt you wear is more important than landing a spacecraft on a comet. (The Verge)

Why I love the stock market. (A Wealth of Common Sense)

...But don't follow Tony Robbins' financial advice. Just... don't. (Barry Ritholz)


Got an interesting article or recipe to share? Want some extra traffic at your blog? Send me an email!


How can I support Casual Kitchen?
Easy. Do all your shopping at Amazon.com via the links on this site! You can also link to me or subscribe to my RSS feed. Finally, consider sharing this article, or any other article you particularly enjoyed here, to Facebook, Twitter (follow me @danielckoontz!) or to bookmarking sites like reddit, digg or stumbleupon. I'm deeply grateful to my readers for their ongoing support.

Create Your Own Food Myths for Fun and Profit

One more post on food myths. Sometimes, people and organizations can gain--and even profit--from food myths. And once in a while you’ll find organizations that profit by making up their very own myths.

Which brings us to the two worst examples I've seen of a someone creating and profiting from food myths. Coincidentally (or not), both examples come from the same organization: The Center for Science in the Public Interest.

The CSPI is an attention-hungry watchdog group with the laudable mission of protecting and advocating for consumers. The organization's thirst for media attention, however, led to the publication of their infamous Ten Riskiest Foods report a few years ago, giving us our first example of a profitable myth: the myth of the "epidemic" of food poisoning.

I encourage readers to take a moment to look at my fisking of the Ten Riskiest Foods report. Under the guise of warning us of a seemingly serious health risk, the CSPI did a few things:

1) It encouraged consumers to avoid several perfectly safe and healthy foods because of massively exaggerated fears of food poisoning.

2) By manufacturing a health scare it drew attention and resources away from real health policy issues.

3) The CSPI itself gained an enormous amount of media attention, thanks in large part due to its own exaggerations and sensationalism.

Points 1 and 2 could be dangerous, point 3 is merely self-serving. But if we take all three points together, we severely stretch the boundaries of public health ethics.

On one level, the Ten Riskiest Foods report was well-played. There's a lot going on in the world, and people can only give their attention to a fraction of the things happening out there. "Food poisoning by ice cream" is the kind of thing that grabs readers, which is why so many people saw and heard media reports on this study. And of course nobody--certainly not the journalists repeating the myths--bothered to break out a calculator to figure out that the total number of cases cited in the report worked out to less than a rounding error.

Interestingly, despite an incredibly low incidence rate, we all seem to have a vague sense that food poisoning is a serious and growing problem. And yet, like airline crashes, we only hear about every single event because they are so rare. Which further serves to illustrate the power of myths.

The result? The CSPI gets the publicity, and we get a myth. A myth that greatly misleads us about the actual risks we face in life. This is one of the many reasons why in the modern era, when life is the safest it has ever been, we all feel more fearful than ever.

But perhaps an even worse example of CSPI mythmaking came long before the Ten Riskiest Foods report was a even glint in this organization's eye. This example dates all the way back to the 1980s, when the CSPI got media attention by pushing for increased use of transfats. Yes, increased.  That was until it changed its own myth--and got still more media attention--by later advocating against them. This excellent article from the Media Research Center summarizes the story here.

Granted, an organization is free to change its mind, and many nutrition scientists did just that about transfats: they decided they were a lot less healthy then they thought before.

What's glaring here is how the CSPI benefited from holding both positions without ever having to own up to being wrong. They voted for transfats before they voted against them!

Perhaps it isn't quite fair to single out the CSPI. It's far from the only group out there standing to gain from mythmaking. Plenty of food pundits employ the "healthy food has to be expensive" myth to rationalize all sorts of subsidies, food bans and politically imposed food policies. Even New Jersey's own Cory Booker, a perfectly good guy, helped spread that myth--admittedly inadvertently--when he did his incompetently executed food stamp challenge. Booker got positive media coverage and political credit for showing empathy with the poor. The rest of us got more "proof" that it costs a lot to eat healthy.

But do you want to know who is the quintessential exemplar, right now, of someone who gains from food myths? The Food Babe--with her downright freakish talent for manufacturing phony health scare myths on a near-weekly basis.

One final thought: A good myth is hard to debunk. It can take years. Think of when a newspaper runs something inaccurate, and then later runs a correction. The original story usually runs on the front page, where everybody sees it. The correction runs in tiny print on page A-29, where nobody sees it.

Remember these two examples from the CSPI. They got the publicity, the donations, and the reputational benefit of (supposedly) fighting for the consumer. We got stuck with conflicting information and still more myths. Heads they win, tails we lose.

Readers, is it ethical for advocacy groups to bend the truth to gain attention for their cause--even if it's ostensibly a good cause? What do you think?


Read Next: The Tragic Tale of Peat Village: A Natural Resource Fable


How can I support Casual Kitchen?
Easy. Do all your shopping at Amazon.com via the links on this site! You can also link to me or subscribe to my RSS feed. Finally, consider sharing this article, or any other article you particularly enjoyed here, to Facebook, Twitter (follow me @danielckoontz!) or to bookmarking sites like reddit, digg or stumbleupon. I'm deeply grateful to my readers for their ongoing support.

CK Links--Friday November 14, 2014

Links from around the internet. As always, I welcome your thoughts.

PS: Follow me on Twitter!

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"This year’s crop of fall cookbooks is one of the best I've seen in ages." (Dad Cooks Dinner)

Wine's not-so-quiet hypocrisy. (1 Wine Dude)

"GM technology has reduced chemical pesticide use by 37%, increased crop yields by 22%, and increased farmer profits by 68%." (Jayson Lusk)

Marion Nestle celebrates the various food-related ballot measures passed with last week's elections. (Food Politics)

Intriguing diary of an intermittent faster. (Equinox)

Screwing your future self. (Mr. Money Mustache)

Bonus! How to grocery shop... with your middle finger. (Mr. Money Mustache)

We are all confident idiots, extemporizing on topics we know nothing about. (Pacific Standard)

...and still more on the Dunning-Kruger Effect: The value of "I don’t know." (A Wealth of Common Sense)

The police are still out of control. I should know. (Politico Magazine)


Got an interesting article or recipe to share? Want some extra traffic at your blog? Send me an email!


How can I support Casual Kitchen?
Easy. Do all your shopping at Amazon.com via the links on this site! You can also link to me or subscribe to my RSS feed. Finally, consider sharing this article, or any other article you particularly enjoyed here, to Facebook, Twitter (follow me @danielckoontz!) or to bookmarking sites like reddit, digg or stumbleupon. I'm deeply grateful to my readers for their ongoing support.

Food Myths

Over at Jayson Lusk's blog, this post about a hard-to-kill food myth about iron in spinach got me thinking about the various myths we hold about food, fitness and health, and how difficult it can be for the truth to win out over lies.

Perhaps this is because some food myths have more than just one lie protecting them. With the "spinach is an excellent source of iron" myth, there are--believe it or not--multiple nested lies. Here's the first:

The myth from the 1930s that spinach is a rich source of iron was due to misleading information in the original publication: a malpositioned decimal point gave a 10-fold overestimate of iron content [Hamblin, 1981]. Once a paper with misleading information has been published, it is almost impossible to stop citation. (pp. 448–449, emphasis added) [1]

How is this a lie? Because the story about the misplaced decimal point isn't true. There never was any such decimal point error made! And yet through a series of unusual coincidences, this "falsehood about a falsehood" was repeatedly cited in both academic journals and general media reports.

It gets worse. Dr. Terry Hamblin, the accidental architect of our first myth, also perpetuated yet another myth--one that's found its way into our modern popular culture: that "Popeye was created in order to promote spinach for its iron content." Here's the real truth:

According to Sutton (2010a: 13–14), Elzie Crisler Segar had an entirely different nutrient, vitamin A, in mind when he invented Popeye and contributed to a massive increase in spinach consumption in the United States during the 1930s.

Today, of course, we know why spinach is a poor source of iron, and it's not because spinach doesn't contain any. It does! Rather, it's because the human digestive system simply cannot absorb the iron present in spinach. [2]

So, what we have here is a myth inside a myth, inside another myth--which brings us, in a roundabout way, to the truth. Sort of.

This isn't to criticize Dr. Hamblin, who, from what I've read about him, strikes me as a genuinely good guy who gladly and sincerely owns up to his errors.

Nevertheless, the spinach myth offers us an intriguing example where scientists weren't just wrong: they were wrong about how they were wrong. And then wrong about how they were wrong about being wrong. And after multiple academic journals as well as the general media propagate this myth into the collective consciousness of, well, everyone, it becomes nearly impossible to set things right.

Which brings up a logical question: what other myths have we been fed? Sure, the myths about spinach turned out to be more or less harmless, but it's easy to think up several food and health myths that were once widely considered "true" but are now thoroughly debunked--and with far from harmless outcomes. Some examples:

* Our "food pyramid" should be built on mostly grains and carbs.
* Dietary cholesterol is a major driver of blood serum cholesterol.
* Eggs are bad for you.
* Vaccines cause autism.
* Margarine is better for you than butter. [3]

I can add to this several politicized food myths that I've sought to help debunk myself here at Casual Kitchen. For example, the myth that there's logic to banning large sodas. That we're running out of food. That locavorism is good for the environment. That "never from concentrate" orange juices are natural and not heavily processed. That vegetarians are Nazis looking to take away your meat. And so on. Finally, Casual Kitchen's core principles are based on debunking the ludicrous and dangerous myth that healthy food has to be expensive.

One final thought: These are just the myths we now know are myths. What other things do we currently "know" to be true now that haven't yet been debunked? What things do we confidently assume today that just haven't yet been outed as myths? Come back in twenty years and I'm guessing you'll have a list several times as long as the one above.

Think about that for a moment or two and tell me that's not incredibly sobering.

Readers, what do you think? I want to know.


Footnotes:
1) The academic paper that’s the source of the italicized quotes above is entertaining, and very much worth reading in its entirety. I'd like to thank Jayson Lusk for pointing me to a sobering look inside the world of academic studies and how they often--inadvertantly or otherwise--propagate misinformation.

2) Don't take this to mean you have to stop eating spinach! You may not get much iron, but you can get many other nutrients from it. In fact my own eye doctor wife recommends spinach (as well as other leafy greens like kale, collard greens or swiss chard) to her patients for good long-term eye health.

3) The butter/margarine myth is a fascinating special case. It started out as "butter is better for you than margarine"--a true statement that was later debunked, and then still later, undebunked.


How can I support Casual Kitchen?
Easy. Do all your shopping at Amazon.com via the links on this site! You can also link to me or subscribe to my RSS feed. Finally, consider sharing this article, or any other article you particularly enjoyed here, to Facebook, Twitter (follow me @danielckoontz!) or to bookmarking sites like reddit, digg or stumbleupon. I'm deeply grateful to my readers for their ongoing support.