Open, not shut, case - Extra information can be a bad thing if you do not keep an open mind


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

Dan Kahan last appeared on The Value Perspective in Tale of woe, when we discussed his work on the way people’s numerical skills can be affected when they are asked questions that conflict with firmly held beliefs. The Yale law school professor has now taken things a step further with a new paper entitled Climate science communication and the measurement problem.

This illustrates how two tests – one on people’s general scientific knowledge and the other on climate change – can be used to gauge “individuals’ reasoning proficiency as collective-knowledge acquirers independently of their reasoning proficiency as cultural-identity protectors”. In other words, the degree to which how we see ourselves and what we believe affects what we think we objectively know.

Kahan first sought to establish his test subjects’ scientific knowledge with a series of progressively tougher questions – starting with the likes of “electrons are smaller than atoms – true or false?” and “which gas makes up most of the earth’s atmosphere – hydrogen, nitrogen, carbon dioxide or oxygen?” and then upwards to, finally, the altogether more cerebral topic of conditional probability.

The better people’s ordinary scientific intelligence, the more likely they were to answer more questions correctly as they moved up the scale. Thus, as more people knew electrons are smaller than atoms and nitrogen makes up most of the earth’s atmosphere while only a handful had the first idea about conditional probability, Kahan ended up with some nice upward-sloping graphs such as those below.


Source: Climate science communication and the measurement problem, Dan M. Kahan – 25th June 2014

But within the tests there were also a number of questions whose answers – and we are choosing our words carefully here – do not receive quite the 100% support of the scientific community as those relating to electrons and nitrogen. These concerned, for example, evolution and climate change and the associated graphs were less upward-sloping than the others.

At first glance, this might suggest the questions represent a less good test of scientific understanding. However, Kahan then broke his test subjects down into two groups we might broadly call ‘believers’ and ‘non-believers’ and found this appeared to have a significant bearing on the answers, with one group moving away from the consensus despite their generally better scientific understanding.

Now, labels such as ‘right’ and ‘wrong’ can be a little emotive in these sorts of areas so we will seek to deflect any correspondence towards professor Kahan by simply running two more graphs that stem from his question: “Is the earth getting warmer (a) mostly because of human activity such as burning fossil fuels or (b) mostly because of natural patterns in the earth’s environment?”


Source: Climate science communication and the measurement problem, Dan M. Kahan – 25th June 2014

As you can see from the left-hand graph, the better a person’s ordinary scientific knowledge, the more likely they were to pick (a) but the graph is noticeably less steep than the earlier trio, suggesting this is a poor test. But look at the divergence when the test subjects are broken down into ‘liberal/democrat’ and ‘conservative/republican’ – the latter’s results in the right-hand graph have a negative correlation.

In other words, we have a group of people who are far more scientifically knowledgeable and much more able to digest and analyse the available data than the wider population and who have come to conclusions that are seriously at odds not only with that wider population but also their peers at the opposite end of the political spectrum.

The crucial point here is not about whether a particular answer to a particular question is right or wrong but that, the more ability and information is added into the mix, the more it is possible for people’s views to diverge more strongly – which brings us to another ‘Dan K’ whose work we revisit from time to time on the value perspective.

In Inherent risk, we highlighted the ideas of Nobel prize-winning behavioural theorist Daniel Kahneman about ‘system one’ and ‘system two’ – what we might effectively think of as the subconscious and conscious parts of the human mind – which he addressed in his 2011 book, thinking fast and slow.

According to Kahneman, our ‘system one’ subconscious reacts and makes decisions automatically for a variety of sound evolutionary reasons and does so with little effort or indeed understanding on our behalf. Our ‘system two’ conscious meanwhile is involved in all our deeper thinking but is also inherently lazy and would rather do nothing if an instant judgement is available from our subconscious.

Now, as value investors, we aim to use all available evidence and data on a particular investment to help us move from ‘system one’ to ‘system two’ thinking – from gut reaction, as it were, to what the numbers show us. But what Kahan’s paper suggests is that starting out with a bias – a view on a particular sector or stock or whatever it might be – is a genuine investment risk.

So the opinion “this is a structural growth industry” – every bit as much as, say, “I am a conservative” – means you have identified your own ego or your own labelling with a certain belief system and thus, as you add more information, there is at least a risk you will diverge from the views of other people – and not in the good, contrarian way so often advocated on The Value Perspective.

Instead, the new information you have acquired will sometimes give you greater confidence to move away from the truth – and for anyone who thinks that should have read ‘truth’, please address your letters to Professor Dan M Kahan, Yale University – Law school, P.O. Box …


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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