It happened again – Self-enhancing transmission bias

self-enhanciing transmission biasI caught myself again yesterday.  I was having coffee with an ex-colleague of mine.  Back from the phase in my life when I was doing my ‘corporate duty’.  I do like to occasionally check in with my ex-colleagues to see whether the corporate life has improved since I had left three years ago.  And it …

But I am digressing.

Anyway, my colleague asked me how my life as an investor (and occasional trader) is going.  Absentmindedly I shared some of my successful trades.  And that was it!

I only shared my wins and did not mention any of my numerous learning experiences.  I do prefer to refer to my losses as learning experiences.  It has a more positive vibe to it that way. (“Sometimes you win, sometimes you learn”).

This fact of my all-too-lopsided answer to his question dawned on me only on my way home.

So, back home I checked my mighty external brain (aka Internet) for some proof on whether I am normal and whether there is a specific term for this cognitive bias.

The good news is:  Apparently everyone shares their successes more than their failures.

The bad news is:  This Self-Enhancing Transmission Bias leads to a false perception of reality and inability to accurately assess situations.

Well, talking about how successful we are is a good way of maintaining our own self-image and of enhancing our reputation.  Generally we prefer to present ourselves in as positive a light as possible short of actually lying: but selective omission of information, like failing to mention the 51% of trades we made that went wrong, seems to be acceptable to most of us.

In a social context most people who exaggerate their abilities will tend to be found out though. – Sharks, no chance to escape here.

But the more remote the social interaction the harder it is to detect. – Yeah, that’s easy.  After all I have not lied, right?

As Jason Zweig remarked: “Being right is the enemy of staying right — partly because it makes you overconfident, even more importantly because it leads you to forget the way the world works.”

And how does the world work in regards to novice investors and traders?

We do look for ideas on the world wide web – who doesn’t sporadically lack creativity or initiative – pick our Gurus and follow them.

Could it be, however, that those Gurus do only share their success stories and suffer from convenient amnesia when it comes to write about their failures?

According to the research they do.  All of them.

Lesson: If you get your trading ideas by following people on the internet who tell you that they’re great at investing, you have only yourself to blame for your losses.

Don’t do it.

Avoid future crashes.

avoid crashes

By the way, this self-enhancing transmission bias is at the root of many of our (potential) crashes.  Here is another example.

4 Comments

  1. Hi Andy,

    It is not easy to share the failures particularly because it put oneself in a vulnerable state and might deter others to invest. However, we still know that the good outweighs the bad right? 🙂

    • Hi Jes,

      True, it is not easy. But then we always have a choice to chose a “positive failure attitude”. Trying is the first step towards failure. We are imperfect because we are human. There is simply no shame in being wrong, only in failing to correct our mistakes as every failure is a learning opportunity.

      My favorite reminders on developing a “positive failure attitude”:

      “Anyone who has never made a mistake has never tried anything new.” – Albert Onestone aka Einstein

      “A woman must be big enough to admit her mistakes, smart enough to profit from them, and strong enough to correct them.” – John C. Maxwell I assume the same applies to men

      “It is impossible to live without failing at something, unless you live so cautiously that you might as well not have lived at all — in which case you have failed by default.” – J.K. Rowling, author

      Have fun failing! The good will always prevail.

  2. Hi Andy,

    The most worrying thing for me in not working is NOT, the not working per se, but the limiting of diverse human interaction. This u have avoided by still catching up with ex-colleague. Thumbs up!

    Yes, sharing of successes only reminds me of Facebook where you will only see pictures of how good a person life is! 🙂

    I feel that acknowledging mistake not just by heart, but by the lips or thru words are very important too! I

    I remember an advice by a wise old man for me if I interview someone: “Those people who only talk about how good they are, and never mention anything about their failures in career are not very desirable candidates!”

    • Hi Rolf,

      You are worrying too much 😉 I do miss the diverse human interactions too. While working they just happened. Once I stopped working I have to actively seek them.

      Exactly, that’s why spending too much time on Facebook can make one depressed as we compare our regular lives to the fancy lives of others. I do not have a Facebook account, yippee.

      Wise indeed. Another wise man once remarked: “My great concern is not whether you have failed, but whether you are content with your failure.” – Abraham Lincoln

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