Those who invest by themselves quickly learn that it is not others who fool them. We fool ourselves. Investing in the wrong stock or not selling when signals clearly show otherwise are just some of the many ways we make mistakes and fool ourselves.
However, this issue of making a fool of ourselves is not limited to investing. It is pervasive. The question to be asked is, why do humans so easily fool themselves? Some explanations for why we do this:
Evolution and Biology
The evolutionary biologist, Robert Trivers, explains that “If deceit is fundamental in animal communication, then there must be strong selection to spot deception and this ought, in turn, to select for a degree of self-deception, rendering some facts and motives unconscious so as not to betray – by subtle signs of self-knowledge – deception being practiced.” In other words, we have evolved to easily deceive, and this includes deceiving ourselves. This may have been an asset in ancient environments; however, we have now placed ourselves into a situation where if we human beings continue to self-deceive, we may not survive.
The psychologist and humanist Daniel Kahneman describes two mental processes, the first, more automatic, dominant, and given to rapid responses, called “System 1”. This is characterized as being “intuitive” and is “the secret author of many of the choices and judgments” we make. However, System 1 has “known biases” that “recur predictably in particular circumstances.” It is through, what Kahneman calls “System 2” that one can overcome System 1 errors. System 2 features mental processes that require “effortful mental activities” that carry out complex computations and give rise to an understanding of probabilistic calculations.
System 1 serves us well in many situations that need automatic and quick reactions. The modern world’s complexity is, however of a different kind from the world where homo sapiens first evolved. System 2 processes are urgently required, yet System 1 is dominant and hence the plethora of errors and the fooling of ourselves, a situation that can perhaps only be addressed by a better System 2 designed education.
Evolution and Sociology
The journalist and author, Elizabeth Kolbert, in her article “Why Facts Don’t Change Our Minds,” reviewed three books that addressed the issue that “Even after the evidence ‘for their beliefs has been totally refuted, people fail to make appropriate revisions in those beliefs’. How did we come to be this way?”. Kolbert writes that “the task that reason evolved to perform is to prevent us from” being taken advantage of by others. “Living in small bands of hunter-gatherers, our ancestors were primarily concerned with their social standing and with making sure that they weren’t the ones risking their lives on the hunt while others loafed around in the cave. There was little advantage in reasoning clearly, while much was to be gained from winning arguments.” We no longer live in hunter-gatherer tribes but these ingrained, “persistent beliefs which are not just demonstrably false but also potentially deadly” remain, unless we make great efforts to become aware of our biases and learn to change.
The need for self-learning and experimentation
The above gives some possible reasons why it is so easy to fool oneself and why Socrates had “Know thyself” as the first step in a journey of discovery. There are no easy solutions, but changing how we “educate” ourselves and our children may help.
For most humans, education is a process where students are “instructed” in classrooms rather than encouraged to “self-discover” inside and outside school hours. Over our formative years, we get told stories, and knowledge appears to be “revealed” by experts. Self-learning and experimentation, and observation are rarely the norms, even in communities where questioning is encouraged.