The Backfire Effect
The Misconception: When your beliefs are challenged with facts, you alter your opinions and incorporate the new information into your thinking.
The Truth: When your deepest convictions are challenged by contradictory evidence, your beliefs get stronger.
So how does this work?
Once something is added to your collection of beliefs, you protect it from harm. You do it instinctively and unconsciously when confronted with attitude-inconsistent information. Just as confirmation bias shields you when you actively seek information, the backfire effect defends you when the information seeks you, when it blindsides you. Coming or going, you stick to your beliefs instead of questioning them. When someone tries to correct you, tries to dilute your misconceptions, it backfires and strengthens them instead. Over time, the backfire effect helps make you less skeptical of those things which allow you to continue seeing your beliefs and attitudes as true and proper.
You can see these effects in politics and in economics. You can see it investing as well; certainly as the housing bubble was live there was no dissuading people that the housing bets were rational and safe. I have had my own run ins with this as well. What is fascinating is how we are able to take in information which objectively disproves our thinking and yet come away even more convinced of our thinking as a result. Genius!
Note this about suspension of disbelief and information processing:
What Gilbert, Petty, and Montier have demonstrated is that human beings have to suspend disbelief to process information and make judgments based on that information. Unfortunately, distractions (think bread and circuses) can lead people to believe something is true when in fact it is not – with grave implications for investing.
However, that’s not what happens with strongly-held beliefs at all. I remember talking to my mother about the Montier post, asking her about her own strongly held views on religion. Her answers were interesting because it demonstrated to me an unwillingness to even process information that ran counter to her most cherished and strongly-held beliefs. She admitted this interpretation was correct when we discussed it afterward. Remember what Montier said "in order for somebody to understand something, belief is a necessary precondition." The point was that she didn’t even process the information – such an existential threat it was to her.
Human beings have a very clear view of self and this is strongly intertwined with a belief system which generates what we describe as core values. So, if you attack those core values, you are likely to get an irrational and reptilian response. There is no processing of information
–Spinoza, Descartes and suspension of disbelief in the ivory tower of economics
I was perplexed by this refusal to relinquish strongly held views until the backfire effect put a name and process to the experience.
Has anything you have learned on finance blogs changed your strongly held beliefs about the economy, asset markets, the financial system and how they works? Or have you been seeking out those blogs most ideologically aligned with your pre-conceived world view? How do you think the backfire effect will impact the current debates on quantitative easing, austerity, and the situation in Greece?
My take: Be optimistic! Pendulum swings in policy and ideology are a product of people without conviction on issues taking sides. In today’s context, political and ideological battle lines will harden. Eventually, someone will win these policy battles and policy will tilt one way. Afterwards, one side or the other will be proved right by events. And then we can start all over again with the backfire effect because you can’t disprove a negative. But, those in the middle who lacked conviction about the outcome, who didn’t have a strong view will be convinced by the empirical evidence and they will move the ball forward, backfire effect notwithstanding.
Also see: The Science of Why We Don’t Believe Science and How facts backfire
I found Ian Ayres book Super Crunchers gives an interesting, if drawn out, perspective on how statistical (evidence based) analysis often (almost always) trump human intuition or “reasoning”. Particularly illuminating is the section on medicine.
Barry Ritholz at the Big Picture blog is also big on how biases affect investing.
The problem I have with this is:- well yes, but where does that leave you but floating in a sea of confusion and relativity?
At some point you have to anchor your opinions while at the same time be willing to change them.
This is tricky – especially in the public sphere where reputation are there to be shot at and gloating abounds. Add money into the mix and..
From my own point of view I’m very much a layperson, my day job has nothing to do with economics or investing but I like to consider myself an informed citizen and at present as issues go this is a big one. I do realise, however, that I come with my own inbuilt biases. What do I do to counter these – amongst other things I read Krugman :)
Hear hear Dave! That’s what I try to do. We are hard wired a certain way for a good reason. But we can still try and be informed, in particular, by suspending disbelief when we hear the views of those not ideologically aligned with us.
I think suspension of disbelief is powerful stuff. It’s why we love movies, science fiction novel, and trashy fiction. If only we could take that same attitude to the real world when it counts. You can’t do it every day or you are “floating in a sea of confusion and relativity” but I think most people are smart enough to sense when something is seriously amiss (tech bubble, housing bubble, etc). Taking the leap beyond cognitive dissonance is the last and hardest step.
“by suspending disbelief when we hear the views of those not ideologically aligned with us.”
Yes that’s a very nice way of putting it – I do sometimes struggle with this though!
“Has anything you have learned on finance blogs changed your strongly held beliefs about the economy, asset markets, the financial system and how they works?”
Actually, quite a bit. I remember that I used to think the efficent market theory was elegant, simple, and logically irrefutable. Enough said.
I will add, so as not to appear to be a total dimwit for having believed the efficient market theory, that I have always pondered how different societies have come with so many different cultures, belief systems, and rationales for those belief systems. And they all believe equally fervently that they are correct.
As I get order, I find I KNOW less and less. I expect to hit nirvana when I know absolutely nothing – – in about 20 minutes ;)
Dan,
I STILL believe in the weak version of the efficient market hypothesis! If you ask most people in finance and economics, they would probably say the same. Terms very integral to the Internet and the blogosphere like crowdsourcing, the wisdom of crowds, or collaborative filtering all stem from the same source as EMH.
It is the strong version and the unabiding faith in markets it engenders which has become reviled.
Still I am glad to hear you are re-examining your beliefs. That’s a good thing.
Your correct. I don’t want to go from being a true believer to being a….(oh what is the word when a fervent believer becomes an atheist? apostate???)
Anyway, it is always a good point that many theories aren’t 100% correct, nor 100% wrong. The fact that the EMH isn’t 100% correct of course doesn’t mean its 100% wrong.
But what I find so disappointing in myself in discerning truth is that by the very terms of the theory, it obviously was cockeyed. Why were there booms and busts? If everybody is logical, and doing DISPASSIONATE discounted cash flow analysis …. Pets.com was worth what it was worth???
“As I get order, I find I KNOW less and less.”
Which is as it should be. The key to wisdom lies not only in increasing what you do know, but in acknowledging more of the stuff you know that you do not know. In more detail:
https://jangosteve.com/post/380926251/no-one-knows-what-theyre-doing
…I consider myself inordinately lucky in this arena, given I’ve made what I believed to be good choices, only to have the results prove catastrophic. This proved motivation enough for me to research how I got myself into these positions, always learning the unexpected.
I concur with the wisdom comment: having read till my eyes crossed competing ideas, and having found valid positions from both, the more I “know”, the more I understand I don’t know….but I persevere….and make improved choices as a result.
Good stuff Edward. I admire your optimistic outlook and will try to follow suit. Last summer I was at a conference listening to Cheryl Sandberg of Facebook. It was a terrific session but one point she made struck me as particularly concerning. She described a vision of the Web where users’ experience is completely personalized based on their activity and interests. She seemed to believe this would be progress toward some kind of online nirvana. I’m not convinced.
I agree that people’s convictions become stronger when confronted with contradictory evidence. But I also worry what it will be like if the time comes when people aren’t presented with any contradictory evidence at all.
Hi Jeff,
I think the subtext of what you’re saying is that the Internet is enabling people to cocoon themselves in a world in which they are confronted with contradictory opinions less and less. That means the inevitable backfire effect will be that much stronger, partisan acrimony greater. There is a risk of that. I am comforted by the knowledge that enough people are independent and open-minded to make a difference.
“the Internet is enabling people to cocoon themselves in a world in which they are confronted with contradictory opinions less and less”
As recently pointed out by Eli Pariser’s TED talk on “Filter Bubbles”: https://www.ted.com/talks/eli_pariser_beware_online_filter_bubbles.html
“Has anything you have learned on finance blogs changed your strongly held beliefs about the economy, asset markets, the financial system and how they works?”
I like Fresno Dan’s comment about realising one knows less as one ages – personally I put this down to senility…
I’m still a contrarian tho. I commented on a blog recently that there were reasons to be optimistic in say 5 years time and we’d probably muddle-through til then. The reasons ranged from Moores Law re solar power to the Athabasca tar-sands to advances in battery technology blah blah blah. Any slowdown between now and then would hurt but allow technology to catch-up and prevent e.g. an oil-price-induced recession anyway if there was no slowdown etc blah blah blah.
The point is that whether right or wrong (who knows!), the reaction was totally negative, whilst anyone trotting out the usual “we’re doomed” stuff got loads of “likes”. I thought I had reasons to be a pessimist, but these are clearly already well-reflected in the public at large and therefore in the markets. Every-one now knows we’re well-and-truly in the dark financial forest, so it’s time to start looking on the bright side – I think!
“I like Fresno Dan’s comment about realising one knows less as one ages – personally I put this down to senility…”
As Paul Simon sung about all the crap he learned in high school, I look upon senility as a feature and not a bug.
Being old and decrepit, I remember when the Japanese were buying Rockefeller center and Pebble Beach and were soon to take over the world…
I expect the Chinese to succeed where the Japanese have failed because….they’re ….on the mainland!
So despite my cynical nature, I think your contarian optomistic view has merit – how do I suscribe to your newsletter?
Dan – “how do I suscribe to your newsletter?”
Hah! Although I did think about my own blog & (for some reason that now partially escapes me) I was going to call it “Buried in Concrete”.
But I realised that possibly for years at a time I wouldn’t have anything even remotely interesting or new to say, because for lengthy periods and more than might usually be the case, I really don’t know what’s going on.
All I have is this
https://www.blogger.com/profile/11427759744381570329