“How reliable is human memory?”
That was the opening sentence of a New York Times articleNew York Times | It is a tidy summary of some of the salient issues. that examined “the fallibility and the malleability” of memory in light of the Brian Williams controversy. It got me thinking.
To explore the questions further, I read The Seven Sins of Memory, published in 2001 by Daniel Schacter, professor and leader of a “memory lab” at Harvard.Harvard | This is the site for the lab. The book serves as a great guide to the flip side of our wondrous capability to remember. As noted on the first page: “Sometimes we forget the past and at other times we distort it; some disturbing memories haunt us for years.” What are the resulting implications for investment professionals and organizations?
But first, the sins: Transience is the degradation of our memory over time. Absent-mindedness is a vexing problem, whether regarding your lost keys or something more critical. When you can’t remember a name even though it’s on the tip of your tongue, you’re a victim of blocking. That seems inconsequential in comparison to misattribution, since errors of that type can, for example, lead to incorrect testimony in court that sends the wrong person to prison.
Suggestibility causes us to accept as valid memories that have been manufactured or influenced by others. Bias colors our recollections, rewriting our past “in light of what we now know and believe.” And persistence leads to the inability to shake a memory over time; that’s not much of a problem for good memories, but we can be shackled by bad ones that won’t go away.
I have been cleaning out old files of late, in the process coming face to face with events from throughout my career.CFA Society Minnesota | Here’s a piece I did for my local CFA society about a night with a portfolio manager from thirty years ago. In some cases I had forgotten important things altogether and for others my memory didn’t square with the facts on the page. That’s troubling, but such disconnects are normal. The key is to develop strategies for minimizing the costs of the seven sins, while remembering that each of them “is a by-product of otherwise desirable and adaptive features of the human mind.”
We can be guided by our memory to make suboptimal investment choices. We may have forgotten lessons that we should have retained or we may have misremembered key factors or we may be scarred from past experiences to an extent that we can’t see things clearly.
Investment professionals are supposed to be rational actors, but the landscape that we inhabit works against us. For example, “Hindsight bias is especially pronounced when people come up with after-the-fact explanations that specify a deterministic cause of the outcome.” Wait — isn’t that the defining feature of market discourse, not only in the media and the blogosphere, but during the meetings of investment committees and teams?
And, “A strong sense of general familiarity, together with an absence of specific recollections, adds up to a lethal recipe for misattribution.” If you pay careful attention to discussions about investments within groups, you see this all the time. Bits of history are thrown in the mix for decision making, sometimes accurately portrayed, but often generalized beyond applicability, irrelevant to the circumstances, or simply wrong.
Day to day, the agenda on which we work is primarily reactive, shaped by recent events. To the extent that prior experience would be helpful in dealing with current challenges, the hope would be that such experience could be remembered and communicated accurately. But memory is reshaped over time by subsequent happenings; you don’t get an unvarnished view of events for the perspective you’d want. Experiencethe research puzzle | An earlier piece about “years of experience” asked another relevant question: “Is experience additive?” may not be as beneficial — or memory as reliable — as you think.
We must also face another reality: “The self is hardly a neutral observer of the world.” It plays a “powerful role . . . in orchestrating perceptions and memories of reality,” providing a coping mechanism for us as we do battle in our lives and in the daunting war for alpha. (Therefore, as I wrote in an earlier posting, “When we win, it’s an heroic effort; when we lose, the fates of market life have done us in.”the research puzzle | My comment was summarizing the work of David Tuckett and Richard Taffler on the emotional life of fund managers, examined in this posting.) But while those altered narratives may make us feel better about ourselves, they inhibit our ability to see the world clearly.
So, how do we deal with these sins? Is there a drug we can take to cure them?the research puzzle | Five years ago, I wrote about the prospects for “pharmaceutical alpha.”
Not yet. Awareness is a good place to start, however. Those who lead organizations likely don’t think about these problems at all, even though they can be powerful determinants of performance. (Neither do those who try to judge those organizations from the outside.) At times of market or organizational stress, venial sins can become mortal ones if the present can’t be faced properly because the past was never truly understood.
Something as simple as journaling by portfolio managers (and the documentation of decision making in general) can help deal with misremembering, as can relying on facts rather than memories to inform discussions about the past. (It’s amazing how often professionals lean on some vague impression of events when the facts are available on an expensive data platform nearby.) Since certain people are more susceptible to these errors, perhaps some testing is in order. Is that too creepy? What if it adds value?
There are also tactics for dealing with the “change blindness” that besets us — and the misplaced confidence that comes from fallible memories. Verbal interactions and seat-of-the-pants decisions are likely more prone to these errors than written analyses that can be more carefully scrutinized, unless the leaders of discussions are experts at spotting the signs of dysfunction and combating them.
As professionals, we assume that we are immune from the problems that Schachter examined, and we think that our organizations counteract whatever individual failings we have. In my experience, neither is true (although my recollections should not be accepted without question).