Behaviouronomics: First Conclusion Bias

The moment a sperm enters the human egg, the doors are slammed shut. Our brain is like a human egg. As soon as an idea impregnates the human mind, it closes its doors for other ideas. The first explanation that comes to mind makes us blind towards other more plausible possibilities. Unfortunately, in our complex world, the first conclusions are almost always deceiving.

Recently, I was accused of being unethical and a liar.

Here’s the backstory. On a Friday before the new year eve, at 9 PM, a gentleman knocked on my door. He claimed that my car had hit his car in the common parking area. To show courtesy to a fellow resident, let’s name him Mr. M, I agreed to cooperate and find out more about the incident.

“Did it happen in front of your eyes?” I asked him.

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“No. I was away on Christmas vacation. The security guard in my block called me and told me that your car had hit my car.” Mr. M said. There was a hint of impatience in his reply.

“I see. Did the guard actually see the accident?” I probed further.

“No. But he was informed by another person who was witness to the accident.” He seemed annoyed that I am wasting his time with this useless conversation. Mr. M expected me to accept my mistake immediately and compensate him for the damage.

His argument went like this –

1. The dent in his car had traces of red colour.
2. My car is red coloured.
3. My car parking slot is right behind his parking.
4. There were scratches on the bumper of my car.
5. Someone saw it happening. Although, we didn’t exactly know who that informer was.

My father and I are the only two people who drive my car. So I mulled over following possibilities –

1. A different red coloured car did it, and the informer was mistaken.
2. The car wash guy, who takes my car keys every Sunday, did it. To save himself he gave the wrong information to the security guard.
3. Since I didn’t remember doing it, I might have been sleepwalking while driving.
4. Since my father also couldn’t recollect doing it, he was sleepwalking.

I am pretty sure that sleepwalking gene isn’t there in family blood. Nobody in my family has been spotted sleepwalking. No yet. So I had to rule out the third and the fourth option from my list.

But Mr. M was convinced to his core that I was lying through my teeth. His wife soon joined him.

“I’ll pay for the damages if it’s confirmed that my car was involved. But let’s first investigate what exactly happened.” I tried to be polite.

“What other proof do you want? First, you hit our car which is irresponsible driving and now you’re denying it which is highly unethical.” Mrs. M raised her voice.

She even explained (in an animated way) how I had rammed into their vehicle while reversing my car. They hadn’t witnessed the mishap, but in their mind, they had simulated the scene vividly, many times over.

After thirty minutes of heated discussion, I finally traced the person who had informed the security guard. He promptly navigated us to another red car parked nearby – the real culprit. The other car owner apologised and agreed to settle the matter.

The weekend episode got me thinking. From my vantage point, Mr. M’s behaviour appeared as outright stupid and immature. But that’s how the human mind works. Our minds jump to conclusions. The gentleman fell for something called First Conclusion Bias. Based on the first few facts which were “made available” to him, he latched onto the first conclusion his mind arrived. It was so convincing that he refused to consider any other possibilities.

It’s a natural human tendency. We tend to solve problems by using the first solution that comes to mind. Charlie Munger, in his no-nonsense style, compares human mind to a human egg. He says –

“Human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can’t get in. The human mind has a big tendency of the same sort.”

So what explains homo sapiens’ special affinity towards first conclusions?

Well, evolution has wired our brains in such a manner that it avoids anything which depletes the energy. And nothing consumes more energy in the brain cells than an unresolved observation. Unexplained events are calorie hoggers for our grey matter. Our genes are programmed to conserve energy and embracing the first answer to any problem is a very effective strategy. That’s why we all jump to conclusions by making inferences and assumptions in most things we do in life, and it often helps us.

It isn’t that what first comes to our mind (the first conclusion) is always wrong. But what hurts us is that the existence of what first comes to our mind leads us to feel more certain than we should be that it is correct. In fact, mistakes are much more likely when people are unaware that they have jumped to conclusions, and instead think that their assumptions are actually facts.

First conclusion bias can be very dangerous especially in places like medical profession. Medical professionals often jump to conclusions. Jerome Groopman, author of How Doctors Think, says that “most incorrect diagnoses are due to physicians’ misconceptions of their patients, not technical mistakes like a faulty lab test.”

Groopman explains that many doctors jump to conclusions in the following ways –

1. They assume the patient will state all relevant symptoms (or are forced to make an assumption due to thinking that seeking further personal information may lead to embarrassment),
2. They assume the patient will not want to undergo any unpleasant (albeit effective) treatment,
3. They assume the patient is a hypochondriac and therefore do not take their complaints seriously, or
4. They make a diagnosis even though they have not heard or understood all of the complaints and for whatever reason do not ask for clarification.

In Investing

Stock market investing is fertile ground for situations that trigger first conclusion bias. In the era of cheap data and superfast Internet, access to financial information (and opinions) is easy. Finding a convincing explanation to every observation in the market is just a matter of few taps on your smartphone. Isn’t it?

Why did market go down by 5 percent today? Why is XYZ stock is available for so cheap in spite of the tremendous growth potential?

Tune into any source – TV, newspaper or social media – and you’d find a simple explanation for all such questions. No wonder, ‘jumping to first conclusion’ is one of the favourite sports of most people participating in the stock market.

Getting most of our plausible explanations from headlines – WhatsApp groups, Twitter, and Facebook – can hurt us gravely.

Overcoming First Conclusion Bias

Our brain needs to be trained to recognize and avoid first conclusion bias. One way to do that is to avoid seeking easily available answers to questions that begin with “why.”

Professor Sanjay Bakshi, in his interview with Safalniveshak, spoke about a very relevant example. He said –

Let’s look at this hypothetical stock. It has substantial cash on its balance sheet. It has no debt or other liabilities which have a prior claim on that cash. It also has an operating business. But the market value of the company is less than cash assets alone. This is a “cash bargain.”

Many of my students when they look at this thing, they say, “My God, this is not possible! How is it possible that in a market that is supposed to be efficient, you are seeing a stock selling below cash?”

They want to buy it based on their first conclusions. But under what circumstances would that first conclusion be wrong?

You see, the mind does not automatically think in those terms. The mind, instead, latches on to the first conclusion, which, in this case, is that the stock is ridiculously cheap, so it must be bought.

Now, I tell my students, “Let’s force ourselves to think of three reasons why buying such a stock would be a mistake.”

They have to come up with three reasons. Why three? Why not one? Why not four? Well, three is good enough! The idea is to force yourself to come up with multiple reasons that go contrary to your first conclusion and only when you force your mind to come up with three, will it generate three very good reasons. So what are the three reasons for “not” buying that cash bargain based on your first conclusion that it’s cheap?

Reason 1: Cash burn: Maybe the operating business is losing money and cash will be dissipated away in just a few quarters. This is what happened to dotcoms after that bubble burst. Many companies had raised cash in the IPO bubble and now that the bubble had burst they were selling below cash. There wasn’t any debt because no sane banker would lend such startups any money. But the operating businesses were burning cash at a rapid pace and it was only a matter of time when the cash would disappear. Buying such “cash bargains” when they became available in the stock market, would have been a mistake.

Reason 2: Corporate misgovernance: What if the promoters of the company are well-entrenched because they have a 70% stake, and they have no intention of sharing the wealth of the company with the minority investors? They pay no dividends, and will never liquidate the company. What’s such a company worth? This company is what Benjamin Graham once called the “frozen corporation” which will never be liquidated and will never pay a dividend. Then what the company owns is irrelevant for minority investors, isn’t it? So just because the stock is selling below cash assets alone doesn’t necessarily make it an attractive investment.

Reason 3: Bubble market: When the markets are frothy, people desperately looking for value gravitate towards “cash bargains” because they are evidently cheap. Well, they are almost certainly making a mistake because history shows that when the markets decline, these stocks will also decline, often by much more than the market. So, now we have three very good reasons for not buying the stock and we can now have a much more balanced debate about whether or not we should buy it.

We have trained ourselves out of first conclusion bias. And you have to do this automatically, like breathing. To question your first conclusions by thinking forcefully about why they could be wrong – by doing this over and over again – you will become a better thinker, decision maker, and investor.

Professor Bakshi, in his interview with Shane Parrish, divulged another great hack. He said that we should use the word “Part of the reason is” frequently while thinking about problems. This practice subconsciously trains the brain to keep looking beyond the first few available answers.

Remember, the real insight comes when you’re willing to dig deeper. If the available information could explain everything, then everyone would be rich in the stock market.

Conclusion

Don’t try to explain things by thinking of one reason and then latching on to it. Big outcomes are rarely caused by one reason. Ask “what else can cause this outcome.”

I’ll leave you with this thoughtful quote from Arthur Conan Doyle, creator of the legendary fictional character Sherlock Holmes. He said –

“There is nothing more deceptive than an obvious fact.”

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