The invisible gorilla in investing analysis

I came across a brilliant article, which was simple yet telling. It talks of a perceptual blindess in the field of radiology. I could not help but think of the connection with investing.   invisible gorilla - inattentional blindness   Source: Pierre Fidenci, Wikipedia

Meet the invisible gorilla

Trafton Drew, an attention researcher at Harvard Medical School, conducted a study on radiologists. Lung scans were shown to radiologists and they were asked to check whether the lungs looked healthy or whether they showed signs of cancerous nodules. In an incredibly funny twist, there was a picture of a gorilla waving his fist superimposed on the lung scans. Prominently. Guess, how many radiologists spotted it. Only 17%! Why so less? Because they were not looking for a gorilla. It simply was not in the scope of study so their brains never noticed it. It sounds unbelievable but it is true. For most, it was an invisible gorilla.

This is inattentional blindness

  • Observers fail to notice a visual object or event
  • The object or event is fully-visible and observers readily see it if they are looking for it
  • The failure to notice results from engagement of attention on other aspects of the display and not from aspects of the visual stimulus itself
  • The object or event is unexpected

All four of these criteria need to be satisfied to classify a failure of awareness as inattentional blindness. Source: Scholarpedia (http://www.scholarpedia.org/article/Inattentional_blindness)

Invisible gorillas in investing

Radiologists are trained to do what they do. But 83% overlooked the gorilla. Are we as investors any different? We may be biased and not know it. Take a case where a significant contingent liability figure is given in an annual report but not read by an investor. Or one looks at a great growth in sales and profits in line with past trends and overlooks a negative operating cash flow figure in the same year. There are many examples like this in investing. My learning from the gorilla study is that:

  • I have to have a healthy respect for what I don’t know.
  • I need to be alert so that I do not miss new facts or new inferences.
  • My framework of decision making for investing needs to be flexible.
  • As I keep discovering new points that matter, I need to keep refining and incorporating checks in investing.

Some remedies against the bias

Intellectual arrogance can be the worst enemy of your portfolio. The best investors accept that they don’t know everything. As a result, their antennae are usually up for new developments, new trends and new mechanisms in the market and economy, that affect investments. One might know everything yet forget to apply it. I use an investing checklist that I had shared earlier at Capital Orbit. I sometimes use all of the points in the checklist. There are also times when I overlook a few points if there are strong reasons to do so. But always, I try to be aware of what I do and why I take an action. Most importantly, I keep adding checks and balances. All of us like to think that we are rational. But increasingly, a lot of research is showing that we “think”‘ that we are in control but are not in complete conscious control of our actions. Let us start spotting the invisible gorilla in our analysis before we make an investment. The NPR article on which I based my views is shared below. Why Even Radiologists Can Miss A Gorilla Hiding In Plain Sight?

Recommended reading

Inattentional blindness – Scholarpedia Pretense of knowledge – Hayek

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