On Sunday evening, Rolling Stone magazine released a bombshell retraction and apology for their “A Rape On Campus” story from November 2014. After the publication of an independent review by Columbia Journalism Review of the editorial process associated with the story, Rolling Stone offered the following excuses for publishing an account of a brutal gang rape at a University of Virginia fraternity that could not be substantiated:
1. The alleged victim was very specific about the details of the sexual assault and appeared to be traumatized, and thus deserved the benefit of the doubt;
2. A member of the University of Virginia faculty had originally connected the alleged victim with the reporter, thus lending the story some official imprimatur;
3. The alleged victim was able to manipulate RS’s journalistic process, with Jann Wenner referring to her as “a really expert fabulist storyteller”;
4. The reporter interviewed the alleged victim on eight separate occasions. Meanwhile, the three supposed witnesses were not interviewed, despite the fact that their quotes were used based on the recollections of the alleged victim.
5. The magazine didn’t think through the implications of what they were reporting and the potential for damage to innocent people.
Any one of us could have made these mistakes, given the emotions and sensitivities involved with a story like this. But what Rolling Stone didn’t do is admit what’s likely the main reason why they ran with an uncorroborated, under-reported story like this: They desperately wanted it to be true.
All of the other reasons and justifications are key, but none of them would have mattered if it weren’t for the underlying desire on the part of the reporter and the publication to skewer UVA’s “fraternity culture”and take some privileged scalps in the process.
The alleged victim’s story did not fall into the reporter’s lap, after all. According to CJR’s report, Rolling Stone was actively looking for a story just like this. When you’ve already decided on the truth, it’s just a matter of time before you’ll be able to mount enough evidence to prove it to yourself.
The implications of Rolling Stone’s mistakes, and how they’ll shape the debate over the very real problem of sexual assault on college campuses, are topics the media will be battling over for weeks to come. But as something of an investing monomaniac, it’s hard for me to read stories like these and not connect them to the challenges of being a good investor. The parallels between Rolling Stone’s journalistic failure and the failings that we all face when allocating our assets in the investment markets are too obvious to ignore.
Very often we find ourselves hoping to believe that a story is true. We arrange our minds so that nothing can stand in the way of how we think things should be. We give the facts that confirm our preconceived notions more intellectual weight in our minds, and we omit the elements that may contradict our beliefs.
Confirmation bias is the primary reason why otherwise intelligent people get caught up in asset bubbles that are obvious in the unforgiving light that comes the morning after.
Take the housing bubble, for example: The disconnect between average home prices and wage growth had become massive, despite the fact that the fundamental link between the two is as old as time. Historically, people have had to make real estate choices that they could afford. And then, suddenly, those shackles disappeared. In the middle of the last decade, we had decided that this link was no longer important because of:
a) An influx of foreign buyers;
b) The financing innovations of Wall Street;
c) The “ownership society” promoted by the (George W.) Bush Administration;
d) A few decades worth of data in which home prices almost never declined;
e) Fill in your favorite ad hoc reason for why it should be different this time.
We bought into these ideas, both financially and culturally, because we wanted them to be true. We wanted everyone to be in a position to own the home of their dreams—maybe even two of them. Wall Street wanted the non-stop financing party to continue, as did the real estate brokerages, mortgage servicers, and even the media, which was doing a fair amount of business in classified ads and home listings thanks to the boom.
Sometimes, confirmation bias takes hold because of a political opinion; think about how many people missed out on the economic recovery or the bull market in stocks because of the hyper-inflation story or because they don’t support President Obama. Sometimes it happens for the most old-fashioned of reasons: because it’s good for our bank accounts. As Upton Sinclair said, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”
I could draw similar parallels and tell tales of willful ignorance surrounding the original dot-com boom, or the current echo boom in venture-backed startups, or even the recent gold and silver bust. Investors have been latching onto convenient stories since the South Sea bubble of the 1700s.
When we go looking for a narrative that fits with our existing predilections, we will find one. Remaining vigilant and aware of our tendencies to behave this way is the best defense against disaster.