Cognitive Bias in Military Intel Analysis (and investing)

[Olmsted]

An interesting article about cognitive biases in the context of military intelligence analysis, but I think it can be just as applicable to value investing: Using incomplete information to develop an estimate of current ground truth and predict the future.

 

http://live.psu.edu/story/62664

 

According to Kretz, three groups of nine participants, all engineers at Raytheon, were placed in the middle of an evolving scenario of a series of insurgent attacks. The subjects, who were college educated but not trained in intelligence analysis, had access evidence following each attack and were asked to assess responsibility and motivation after each attack occurred

 

The first group analyzed the data by trying to understand the relationships between known and unknown groups of people -- link analysis. Another group pulled information and weighed the importance of the data, called information extraction and weighting. Researchers briefed the final group on how to use competing hypothesis to explain reported insurgent acts. Creating alternative hypothesis is one way to avoid confirmation bias.

 

The method that worked best was developing and then competing alternative hypotheses.  To me, this sounds like trying to figure out what the guy on the other side of the trade is thinking.  Asking oneself what can go wrong.  Trying to "kill" your company conceptually.  Etc.

 

Interested to hear about how others confront and overcome cognitive biases in investment decisionmaking.