George Soros is one of the best securities analysts to ever live. But he doesn't accept even the idea of that title.
"I am not a professional security analyst," he said in a 2007 interview. "I would rather call myself an insecurity analyst."
Soros is obsessed with being wrong and how he can correct it. It's one of the rarest skills. Successful investing has less to do with scoring big wins than it does avoiding costly mistakes. Swapping out "conviction that I'm right" with "acceptance that I'm probably wrong" is the best way to embrace your fallibility and correct mistakes. Soros explained:
"To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride. Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes."
Doing this is easier said than done, which is why the club of investors with a $25 billion net worth is rather exclusive.
But anyone looking to improve their decision making should start with the idea that correcting and avoiding mistakes means admitting you're often wrong. And the best way to see how wrong you might be is to embrace your enemies -- those people who disagree with your beliefs.
Jonathan Baron, a psychologist at the University of Pennsylvania, has a theory I love called Active Open-Mindedness. Most of us want to be open-minded, as in considering alternative ideas you happen to come across. Active Open-Mindedness takes it a step further. It's going out of your way to track down ideas you disagree with and studying them with more passion than you do your own theories.
Baron tests active open-mindedness by gauging people's responses to statements like:
-- Changing your mind is a sign of weakness.
-- People should take into consideration evidence that goes against their beliefs.
-- It is more useful to pay attention to those who disagree with you than to pay attention to those who agree.
-- It is important to persevere in your beliefs even when evidence is brought to bear against them.
What makes Active Open-Mindedness so powerful is a mix of two realties. One is that something as large as the global economy or the stock market is infinitely complicated. There's no way you can know everything, or even a small fraction of everything. The other is that our ability to concoct a convincing story in our heads is stronger than our ability to objectively analyze facts. The intersection of these two is a cognitively lethal mix of finding one jigsaw piece and convincing yourself not only that you've solved the whole puzzle, but that it's a beautiful picture no one else has seen.
Jason Zweig of The Wall Street Journal explained this well in a recent interview:
"Often people have a very strong, powerful intuition that, 'I know something that the market is missing. Other people are wrong; they don't get it.' ... But the big picture, and the much more subtle observation, is, you don't know what the other people know, because you're only in your own head. You can't get into their heads. In the United States there are at least 100 million of these other people. The notion that you could possibly have insight into what's going on in all of their minds is a little silly."
It's completely silly, I think. But for anyone trying to make decisions about investments -- and I think this applies to a lot of things in life -- you can improve your process by going out of your way to collect and understand as many pieces of the puzzle as possible. You'll never collect them all, but since you already understand your own views, you'll get closer to the full picture if you willingly find, study, and understand the views of people who disagree with you. At worst, you confidently rebut these alternative views. More often, if you're honest with yourself, you'll realize that your initial observations were incomplete, out of context, maybe even wrong. Suddenly, boom, you're closer to the truth. And isn't that your goal?
Baron has a 4-step process to encourage Active Open-Mindedness:
1. Explain your question and why it is important.
2. Present the most obvious answer or answers.
3. Consider less obvious alternatives, or objections to the obvious answers.
4. Rebut the criticisms, or explain how the original answers can be modified to deal with them.
My rule of thumb is, the more confident you are in an idea, the more accurately you should be able to state and rebut the opposing view. It's amazing how much trouble this model can keep you out of.