Smart investors not immune from my-side argument bias

We want smart money managers to run our investments, but it is hard to define what smart means. There is formal reasoning or mathematical skill, but when we say smart, we are focusing on the ability to grapple with arguments associated uncertainty.

An important topic in education is measuring this informal reasoning, or the ability to make arguments to support or reject a proposition. Formal reasoning is defined as the use of logic and mathematics with fixed or formal premises. Informal reasoning focuses on inferences with ill-defined premises and associated with open-ended questions. Most of the problems we face require informal reasoning. Most of the investment problems we face are not analytical, although we would like them to be, but require informal reasoning for poorly defined questions. Unfortunately, most have a problem with formulating opposing argument against our existing point of view. 

A my-side argument skill is the ability to generate numerous arguments for your existing point of view. An other-side argument skill is the ability to develop alternative arguments against your point of view. Any investor will need my-side argument skills to justify his actions, but a great investor has to have other-side argument skills. He needs to argue both the pro and con of an investment thesis. This is a skill that is difficult to teach and measure and may not be correlated with raw cognitive ability. 

What has been found with extensive testing is a my-side bias, the tendency for people to evaluate and test evidence in a manner consistent with our own opinions. We look to confirm not deny our beliefs. The my-side bias is uncorrelated with cognitive ability as measured by SAT scores.  Smart people do it as well as those with less smarts. The my-side bias seems to be negatively associated with more education, but it does differ by beliefs and topics of domain which suggests that individuals have strong belief biases.

Breaking existing belief structures is one of the most important skills for any worthy investor. This even applies for those who are systematic traders like trend-followers. We like the trends that are consistent with our beliefs. We dislike the trends that seem contrary to our beliefs. This bias is why trend followers often don't mess with their models through overrides. You may change a model but don't just select the trades that suit your view of the world from your model. Of course, this can apply to any modeling approach. Fight the my-side views and learn to embrace the other-side and follow the odds even if contrary to your beliefs.