Friday, September 13, 2019

Active open-mindedness - Eliminating some behavioral biases


How do you become a better investment analyst? Simple, have an active open mind. Active open-mindedness or as some have described, active open-minded thinking (AOT) can be boiled down to developing two important skills. One, the open-minded thinker learns to use all new information that is available. An active open minded thinker will be open to new and possibly conflicting information. This type of thinker increases the level of search for information without the demand for direction or confirmation. Two, the active open-minded thinker receives new information, learns, and changes his mind when presented with new facts. He is open to changing views when presented with new information. Some philosophers have called this a "reflective equilibrium".

An AOT process can help reduce some of the key behavioral biases that affect investors. There are biases that can be categorized by their misuse of information and whether the decision-making is open to change. For example, having a confirmation bias would be the opposite of open-mindedness. AOT wants to end any "my-side bias" associated the use of information and inference. Investors should move from my-side to contemplating other-side arguments. There have been tests devised to tell whether someone is open-mined. AOT can be measured and the level of openness can be enhanced.


AOT is more than just being open-minded but actively seeking alternative thinking. It means being more reflective and less impulsive where the main impulse is to maintain the status quo opinion. This could be viewed as a corollary to Kahneman's fast versus slow thinking that is the basis for heuristics and behavioral biases. 

This process of open-mindedness is not an easy skill to acquire, yet it is critical even for those that are systematic model-builders. Start slow; just ask the simple question, "What information do I need to change my opinion?"

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