Bias Blind Spots

Of late my various feeds have been inundated by stories about Apple and its recent fall. For those of you who are late to the party here is a quick catch up. Apple makes things that a group known as fan-bois buy, fan-bois often queue up for days in advance to buy the latest iwanker. Various financial fan-bois predict that Apple will eventually have a share price of $1 trillion a share. Markets being what they are Apple’s share price goes in the opposite direction and fan-bois wring their hands in despair and throw themselves under buses.

I have commented on Apple before within the context of the evolution of a market disrupter into a  mature business. This is simply the natural cycle of all things. However, Apple also allows us to look at the various biases people bring to markets. It does this because of the extreme responses it  generates in its vast army of supporters. These responses are wonderfully extreme and they highlight the irrationality of not only Apple followers but investors and traders in general.

Below is a sampling of some of the things I have picked up.

Are you a value investor? Take the Apple test

Business prof: Apple still in an ‘extraordinarily strong’ position despite disappointing results

Apple Still in Rising Trend

Apple Analyst Thinks The Stock Is A Steal At This Price

The list is endless, simply typing “is Apple undervalued” into Google yields 1,520,000 returns. I would wager at a guess that the majority of responses say yes and therefore imply that Apple is a buy.

If I were to break these pieces down to their component parts I would say that the authors are suffering from the following biases.

1. Confirmation bias – the simple fact is that Apples share price has dropped 35% and the trajectory that once share its share price heading ever upward has ended. The way to defeat this inconvenient fact is to generate information that confirms your existing world view. Facts are forced to fulfil your existing narrative. For example in the articles above Barrons insists that Apple is still in a rising trend. Initially, you would think that this is a quantitative rather than a qualitative statement. That is it can be easily proven or disproved and therefore would not be subject to any form of bias. Unfortunately, the fallibility of our own psyche doesn’t understand that logic and we can see a share that is clearly in downtrend as being in an uptrend. As an example of this many years ago I attended a function being held by a very famous stock market personality. He produced a chart that had price starting in the top left hand corner and proceeding in an almost linear fashion to the bottom right hand corner. He was convinced that this represented an uptrend because there was a tiny tick up at the end of the chart that was barely perceptible. His conviction came not from the data which was unequivocal but rather from his bias.

Many traders fall foul of trading what they would like to see rather than what they see.

2. Optimism bias – If you look at any forecast that is of a fundamental nature then you will see optimism bias in full swing. Optimism bias is simply a situation where someone’s subjective confidence in their own forecasting ability is greater than their objective accuracy. It is well known that the forecasting ability of experts is woeful yet their blind optimism in their own ability forces them to continue to make forecasts. They are completely immune to the embarrassment of continual failure because they are insulated by their narrative. Monkeys love a good story, as such we are more swayed by stories than facts. If we have a good story then it will insulate us from the failings that optimism bias generates.

All traders have bias blind spots- things that we don’t adequately account for or are aware of. The only way I know of to compensate for these biases is to operate as mechanically as possible. Even then we are all capable of conning ourselves.