Fooled by causality bias

by **Cals** Mon 22 Feb 2016, 03:30

Sunday, 21 February 2016 | MYT 4:01 PM

Fooled by causality bias

BY MARK REIJMAN

Not everything in life happens for a reason.

AS HUMANS, we are most happy when the world makes sense to us. It’s much easier to understand the world if things happen for a reason, than if they happen randomly.

Therefore, we love to create stories. Even when there really isn’t a story at all. Seeking causality – how one event causes another event – is probably hardwired in our brain because it had evolutionary advantages.

For example, if you could find out where, when and why dangerous animals were lurking, you could stay away from them and you had a better chance to survive and pass on your genes.

However, this also led us to “find” causality when there was in fact none. It used to be safer to find too many, than too little.

The Ringgit always has a story

Let’s say today the Ringgit appreciates a bit and increases in value versus the Dollar and the Euro. Tomorrow, experts on TV and Internet will claim that this Ringgit appreciation is quite understandable, because financial markets have lost faith in the Dollar and Euro due to low economic growth expectations in both economies.

The Euro and Dollar become less attractive versus the Ringgit, hence the Ringgit increases in value.

But what if the Ringgit had instead depreciated a bit and lost value against the Dollar and the Euro? Would the experts have said that it didn’t make sense?

Would they have stayed quiet? Of course not! The experts would have made sense of the depreciation with another, equally likely and acceptable, story.

They would have pointed out that lower economic growth in the United States or Europe would hurt Malaysia’s export and tourism sector and that would have caused the depreciation of the Ringgit.

Why experts are never wrong

This is why experts are never wrong when they explain things that have already happened. A plausible story - with a grain of truth - can always be found and we are all too willing to accept it, because we want to hear stories that assure us that the world makes sense, including every movement in the value of our Ringgit.

The value of the Ringgit is determined by thousands of factors and is so complex that nobody is able to perfectly predict it. If people could, they would be millionaires!

If one event (lower economic growth in the United States and Europe) can explain both the rise and the fall of the Ringgit, it actually fails to explain anything at all! All it does is satisfy our craving for a coherent world that makes sense.

Day to day changes of the value of the Ringgit are mostly the result of randomness. The truth is that it is both lazy and inaccurate to explain events with superficial stories.

Daily causality biases

But also on a much smaller scale, the causality bias – the need to find a story to explain events – occurs frequently. Let’s say you always have roti canai as breakfast, but one day you decide to have cereal instead. Exactly that day you are in a traffic accident!

Or you think about your friend Z, and on that day Z actually calls you! “Fake” causality is also the reason for many superstitions.

On the day a black cat crosses your path, your stocks go down! It is tempting to relate an outcome with the one thing that you did different that day, but you would only be fooling yourself.

You still would have been in an accident had you eaten roti canai, and your friend Z would also have called you if you hadn’t thought about him! The stock market doesn’t care about cats crossing streets.

When this happens it is better to think about it as “bad luck” or a coincidence, because that is all it is.

The same fake causality can be found in the recent stories about Malaysians spending more than RM100,000 on licence plates with “lucky numbers”.

Some people will have good fortune with the lucky numbers and some will have good fortune without lucky numbers. Some with unlucky numbers will be unfortunate, but so will some without any unlucky numbers. There is no cause and effect.

The only power these numbers carry is making you believe you will be lucky and thereby changing your behavior, for example making you work harder. But your subsequent fortune will be caused by you working harder, not by your lucky numbers.

Lessons learned

What should you take away from this?

First, don’t believe everything so-called experts say, especially when they predict the past.

Second, do not underestimate the role of randomness in your life. In fact, embrace it and accept many things happen out of sheer bad luck or coincidence.

Not everything in life happens for a reason. Try to catch yourself when you are making up a story to explain an event that defies explanation. It’s a bit uncomfortable, but it will sharpen your mind and make you a more critical investor.

Mark Reijman is co-founder and managing director of http://www.comparehero.my/, dedicated to increasing financial literacy and help you save time and money by comparing all credit cards, loans and broadband plans in Malaysia.