Sometimes when we take a position on a controversial topic, we poison our own thinking. Nowhere is this more apparent than in politics.
Back in 2009, while interviewing Arianna Huffington on CNBC, host Larry Kudlow stated, "I have not changed my point of view for my entire adult life." As our own Morgan Housel later lamented:
I struggle to think of a worse trait for someone hoping to understand the world. The guy you want to listen to is the one who is constantly saying: "I was wrong. Here's why, and here's how it's changing my outlook."
There's a name for such a hardheaded phenomenon: the backfiring effect. The idea behind the effect is that when you are presented with factual information that runs contrary to your beliefs, instead of integrating this new knowledge, you actually double down on your previous point of view.
But taking such all-or-nothing stances on important issues isn't limited to politics; when this type of thinking enters our investment mind-set, it can wreak havoc on our portfolios.
Recently, I've been taking a long look at several biases that can poison our investment brains. Below, I'll give you a real-life example of the backfiring effect in action, let you know how you can combat it, and at the end, offer up access to a special premium report.
Is there a more polarizing stock out there?
Back when I used to work at Fool headquarters outside of Washington, D.C., there was a running joke that if you ever wanted to get lots of passionate commenters for one of your articles, all you had to do was write a piece about Sirius XM Radio (NASDAQ:SIRI).
Want proof? Check out this article, published in January 2009, when Sirius was trading for as low as $0.11 per share. In it, Rick Munarriz makes the argument that analysts shouldn't be discontinuing their coverage of Sirius based on its then-impending debt payments and the speculative nature of the stock.
Rick argued that "one less celebrated analyst tracking the company will leave the ultimate lessons in this hit-or-miss case study unheard and unheeded." In other words, analysts who were dropping the company were missing the chance to glean some important lessons for future investors.
But a look at the comments on the piece reveals some passionate thinking that in no way addresses Rick's argument, and that actually had nothing to do with Sirius at all.
One commenter wrote: "Why would anyone buy a subscription to a rag that spends it's time trying to bury an 11 cent stock that you FOOLS pumped?" Meanwhile, another bemoaned the fact that Rick didn't own any shares of Sirius.
The funny thing here is that Rick wasn't really presenting any negative facts about Sirius, but the title made it appear as though he was, and that was enough to make these investors irate, and to double-down their allegiance to Sirius.
There were, thankfully, several examples of cool-headed, well-reasoned responses to Rick's main points. For instance, one commenter, clearly understanding Rick's gist, wrote: "I would think the drama at Sirius would make it more interesting to report about and watch."
What you can do
Of course, I have no way of knowing if any readers actually went out and doubled down on their holdings. The bottom line is that there was a lot of passion, and oftentimes, there's not enough cool-headed reasoning.
One of the toughest things to do as an investor, and as a human being, is to dissociate ourselves from our performance. If I tie all of my self-worth to how I perform as an investor (or as an athlete, cook, or any other pursuit I undertake), then I make it very difficult to honestly assess how I'm doing.
Though I'm far from immune to the backfiring effect, I've found that there are two practices that help me be more honest about my performance.
First -- before doing anything else -- I admit that there's more that I don't know about the world than I do know. By admitting that, I'm accepting the fact that I'm human, and prone to make mistakes.
Second, when I do make mistakes, I need to take the time to acknowledge them -- publicly -- and investigate them for lessons that can be learned.