illusion of understanding

"The confidence people have in their beliefs is not a measure of the quality of evidence but of the coherence of the story the mind has managed to construct" - Daniel Kahneman 'Thinking, Fast and Slow'.

Investing is all about telling a story. Whether it is a management team explaining the latest quarterly results or a fund manager commenting on recent performance or positioning. The best manage to articulate their philosophy or process in such a way that it makes you (as the audience) understand something better. This can lead to the 'Illusion of Understanding', when we believe we understand the world better than we actually do. It is comforting and provides a sense of control and predictability.

Some practical steps to help combat this bias:

1. Apply intellectual humility - remind yourself that there is a limit to your knowledge.

2. Always seek evidence to back up claims when listening to the story.

3. Make notes - I was always a big one for writing (or typing) down claims from a fund manager and making sure to re-read them before going back into the meeting a year later. It isn't to catch anyone out but more to ensure I was being honest with my assessment.