The Misconception: You celebrate diversity and respect others’ points of view.

The Truth: You are driven to create and form groups and then believe others are wrong just because they are others.

The Illusion of Asymmetric Insight is a very good article on the new blog for the book "You Are Not So Smart: A Celebration of Self Delusion". The illusion of asymmetric insight is that you believe you know people better than they know you. You believe you have asymmetric information about their persona, but they don't have the same about yours. You believe you can see more of the iceberg than you really can.

I like to point out asymmetries and this is an interesting one. Reading the article reminded me of a comment I hear from time to time "Yeah, we use X, too" (you can fill in the black for X with words like "tactical asset allocation", "relative strength", or "technical analysis" or "money management and position sizing". People sometimes believe they know what someone else does, or how they do it, when they really have no idea. For example, I was interviewed by Investors Business Daily about one of the basic parts of my portfolio management system and many people I spoke to afterward believed they knew far more than they do about it. Yet, after reading the article they couldn't tell me what buys and sells we executed last week. They have an illusion of asymmetric insight about how we pursue asymmetric returns. Other times I get the question "what do you use?", asking what research services, etc. we may "use". The fact is, our systems and tactics are all completely proprietary and developed into our own programs. Yet, an illusion will lead someone to say "you just be using X" or "you are probably doing Y". Their illusion is a function of their own frame of reference: the things or methods they happen to know about. You know what they say about "assume".

The illusion of asymmetric insight makes it seem as though you know everyone else far better than they know you, and not only that, but you know them better than they know themselves. You believe the same thing about groups of which you are a member. As a whole, your group understands outsiders better than outsiders understand your group, and you understand the group better than its members know the group to which they belong.

The researchers explained this is how one eventually arrives at the illusion of naive realism, or believing your thoughts and perceptions are true, accurate and correct, therefore if someone sees things differently than you or disagrees with you in some way it is the result of a bias or an influence or a shortcoming. You feel like the other person must have been tainted in some way, otherwise they would see the world the way you do – the right way. The illusion of asymmetrical insight clouds your ability to see the people you disagree with as nuanced and complex. You tend to see your self and the groups you belong to in shades of gray, but others and their groups as solid and defined primary colors lacking nuance or complexity.

That part made me think of the so-called "passive vs. active management" debate. It's really not much of a debate. Some people argue that investors should create an asset allocation policy and allocate to index funds. Others believe you should actively pursue the return profile you want. Both have difficulty making a good argument because they suffer from asymmetric insight that clouds their ability to think independently. Instead, they choose a side and spend their time focusing solely on picking on the other side. They choose a "tribe" and follow it blindly. For example, one book that claims to be about "seeking alpha" is nothing but a book about anti alpha seeking. The book is a failure because it leaves out any mention about even the most basic ways one may achieve alpha. It's a book with hundreds of references to academic research without a single mention of the useful academic research supporting alpha. My knowing the illusion of asymmetric insight has probably allowed me to gain a broader perspective. In my pursuit of asymmetric returns (what may be called "alpha" by some), I read and study the "other side" as much as anything. You see, in the literature supporting the other side of the "debate" is where we find the edge. They write a lot and they aren't achieving good results themselves, so they must be missing something. Yet, they don't believe they are. There is where we find the Alpha. If most people aren't finding it, then it must be something they aren't doing. 

So, you pick a team, and like the boys at Robber’s Cave, you spend a lot of time a lot of time talking about how dumb and uncouth the other side is. You too can become preoccupied with defining the essence of your enemies. You too need the other side to be inferior, so you define them as such. You start to believe your persona is actually your identity, and the identity of your enemy is actually their persona. You see yourself in a game of self-deluded poker and assume you are impossible to read while everyone else has obvious tells.

The truth is, you are succumbing to the illusion of asymmetric insight, and as part of a flatter, more-connected, always-on world, you will be tasked with seeing through this illusion more and more often as you are presented with more opportunities than ever to confront and define those who you feel are not in your tribe. Your ancestors rarely made any contact with people of opposing views with anything other than the end of a weapon, so your natural instinct is to assume anyone not in your group is wrong just because they are not in your group. Remember, you are not so smart, and what seems like an insight is often an illusion.

People like to form tribes. They pick a team and sometimes follow it blindly, relying solely on faith with no evidence whatsoever the tribe is the right one. In fact, I recently got an invitation to an ETF conference. It listed several speakers: some in the "passive" camp, others in the "active".  It called on of them "the world's leading technical analyst for ETFs". Yet, if you look at his companies performance you'll find an actual performance history that is far from "leading". If you have no actual evidence your tribe has an edge, you probably have to be either too ignorant to notice or accept it with blind faith. It's a shame even the "leader" probably don't know the difference. The conference go-ers won't hear from any world leader, but instead one whose persona makes someone believe he is. In fact, those who really have an edge in active portfolio management have no real incentive to speak of it beyond general concepts. When you know you have an edge and are able to exploit it, then you may also know that edge can be diminished if too many jump on board. You can probably see how we've come full circle back to another asymmetry.  

If you don't think something is possible, you may consider it's just your own illusion. You shouldn't interrupt those who are doing it - your illusion may be wrong. Instead, you may consider the pitfall of the illusion of asymmetric insight. I know that I do. In fact, I could be experiencing it now. The proof, however, is in the results.