Reverberations in an Echo Chamber

As we look back at the outcome of the state elections in Bihar, one thing is very clear—it was extremely difficult to predict the outcome based on opinion and exit polls. In fact, most polls predicted a very thin margin of vote share difference between the two major opponents. The outcome today may seem obvious—what behavioural scientists call the hindsight bias or knew-it-all-along effect—and political analysts are busy dissecting the numbers and attributing reasons for the victory and the loss.

However, what struck us was how in the run-up to the election results, individuals who had a strong preexisting bias on the outcome of the result seemed to seek out data that confirmed these pre-held notions. This is popularly known as confirmation bias. A quote attributed to British politician Hugh Molson puts this well: “I will look at any additional evidence to confirm the opinion to which I have already come.”

It is natural human tendency to seek out information that fulfils our desire for validating our view. So we actively look for people whose views seem to match ours. We selectively consume newspaper articles that appeal to our thinking. We watch those television channels that agree with our views. And we read opinion pieces and editorials in newspapers and magazines that have a similar leaning to ours. This puts us into what we call an “echo chamber”, where similar views are repeated and reinforced, and contrary views are under-represented or brushed aside as frivolous or biased. The Wikipedia definition of an echo chamber is a situation in which information, ideas or beliefs are amplified or reinforced by transmission and repetition inside an “enclosed” system, where different or competing views are censored, disallowed or otherwise under-represented.

While this might sound bad enough, modern-day social media filtering has made it worse. Once we have made a few initial choices that reveal our leanings, “social media” will systematically find ways to ensure that we are fed with more of what we find appealing. Consider these examples. Our Facebook feed is filtered based on previous history of “likes”. Amazon suggests books to buy based on our pattern of previous purchases. Twitter suggests whose tweets we should “follow” based on those we are already following. It almost seems like the popular Hutch (Vodafone) Mobile advertisement of a dog that follows his master (a young boy) with the punchline “wherever you go, our network follows”. In this case, the “network” ensures you are fed with more of the same, almost to the point when our brains start confusing opinions for facts. In short, the online world has magnified the decibel level of the reverberations in an echo chamber manifold.

Whether the constant reinforcement of similar viewpoints makes us more intolerant as a society (a hotly discussed subject these days) is for sociologists and news channels to debate. However, what we attempt to do in this essay is to see how in the world of business and investing we fall prey to confirmation bias.

Nassim Nicholas Taleb says in his popular book Black Swanthat you don’t reach the conclusion that all swans are white by looking for one more white swan. Before the discovery of Australia, people were convinced that all swans were white. This was an unassailable belief confirmed by empirical evidence. However, one single observation to the contrary invalidated a belief derived from millennia of confirmatory sightings of millions of white swans. But unfortunately, that is not the way we typically function. We do quite the opposite, which is to form our view and then spend the rest of the day finding all the information that agrees with our view.

In organizations, it is not uncommon to see a lack of diversity in views. This often emanates right from the top—i.e. the board of directors. Independent directors provide a good opportunity for senior management/owner-promoters to instil a diversity of views, but more often than not the board is filled with “yes men”. In the investing world, there is a tendency to selectively listen to analysts whose investment ideas match our views. In short, we seek to derive comfort in the echo chamber.

As Austrian-British philosopher Karl Popper says, the only way of testing a hypothesis is to form a view and to spend the rest of the day looking for evidence that proves you are wrong, a process known as falsification. Good decision-makers should consciously seek out diverse views that challenge their existing opinions.

Amay Hattangadi and Swanand Kelkar work with Morgan Stanley Investment Management. These are their personal views

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