Confirmation Bias
Confirmation Bias
It sometimes sounds so easy. Read a blog. Listen to a podcast. Lickety split. The picture is always the same. A primer on how to maneuver through life with minimal road blocks. Want to retire early? Simple, save 50%. Want to buy an investment property? No problem, follow these simple rules. The message being sent is clear. Success is just a few simple life hacks away. The proof is offered up on countles platforms throughout the internet. We talk often about the successes. The failures, however, rarely make it to prime time. The confirmation bias is staggering. We hold on tight to that which confirms our previous held beliefs, and discount everything else.
Whether we mean to or not, we live somewhat in an echo chamber. This doesn’t mean that we are bad people per se or ignorant for that matter. We just tend to hear what we want to hear.
Real Estate
Doesn’t it sound easy? We all expect to be another Chad Carson or Paul Thompson. And why shouldn’t we? The stories of real estate success abound on the internet. There is tale after tale about how using leverage has created the ideal business. Starting with little, investors accumulate much and prosper. What could possibly go wrong?
Well, it turns out, quite a bit. Short term buying and selling is still speculation. Speculation is risky. The more money we bet, the more we can lose. Buy and hold real estate can be very beneficial. If we choose the right property, in the right area, at the right time.
And don’t even get me started about unexpected repairs and difficult tenants.
It is possible. Don’t get me wrong. But there are just as many real estate failures as successes. Not everybody prospers. But because of confirmation bias, we don’t always recognize it. We tend to hold on more tightly to those stories that confirm our previously held opinions.
Entrepreneurship
Just about everybody should own a business. Heck, with low start up cost principles, there is nothing to lose. Start with nothing. Build something. Monetize. And live the good life.
We get this message a thousand times a day from blogs and podcasts. And we believe it because it is what we want to hear. We tune out all the failures we have seen with family and friends. We discount our blogger buddy who was never able to get that tee shirt company off the ground.
And we plow forward and scratch our heads when we never seem to make headway. Blinded by confirmation bias, we completely forget that most businesses fail spectacularly. Small businesses nearly always shut down within five years of their birth date.
This is no joke. The odds are against us from the get go.
Could FIRE Be the Same?
Could FIRE be the same? Have we surrounded ourselves with such positive messages regarding financial independence and early retirement that we have shielded each other from reality? Maybe we have sated ourselves on confirmation bias and no longer even acknowledge any whiff of negativity.
Could it be that there are are early retirement failures all around us, and we just choose not to see? Careful plans being destroyed by sequence of returns risk, black swan events, or even run of the mill white swan events?
Final Thoughts
When you consider yourself part of a community, it is hard not become entrapped in the echo chamber. It is difficult to see through the confirmation bias and recognize the world for how it really is. There certainly is an overly optimistic view of real estate and entrepreneurship in the personal finance community.
Can the same be said for FIRE in general?
I honestly don’t know.
I think the plan to succeed at almost any endeavor is very simple. Take running a marathon, just run one step after another. Pretty simple, except it takes 52,400 steps to finish. And most people can’t run nearly that many. I do wonder what the failure rate is for people who shoot at FI and/or FIRE. I wonder how many bloggers who fail at becoming debt free or making progress towards FI just slip silently out of the community?
I think many.
If you Monte Carlo a BH3 portfolio on portfolio visualizer. 1M @ 4.5% inflation adjusted withdrawal, the first failure occurs at 10 years on a 30 year retirement. If you pull out 4%, the first failure occurs at year 11. With a “super safe” 3% withdrawal rate the first failure occurs at year 12.
Change to a 60/40 US stocks/bonds and 4.5% the first failure occurs at year 14. 4% WR in the 60/40 first failure is year 16. 3% WR on the 60/40 the first failure is year 21. Those are the no bullshit, no echo chamber numbers. Yet who among us doesn’t think a BH3 is a better portfolio than a 60/40? Why it has “diversity”! In this community we are sold a steady diet of nonsense like a religious mantra. The answer is 100% YES FIRE CAN AND DOES FAIL. If you extend your retirement to 50 years (RE) the first failure of the BH3 at 4.5% WR IS STILL AT 11 YEARS! That leaves you only 39 years of being broke. Just what in the heck do you think Suzie O was saying in her challenge to the echo chamber?
The odds are 100% knowable. You don’t have to rely on the veracity of MMM BS and his agenda to plan your future
What’s a BH3 portfolio?
I tried googling but it seems that everyone assumes you already know the answer.
I’m from Australia and I’ve never heard the term before.
Bogleheads 3 portfolio. Total stock market index, Total international index, bond index.
while you say this often, there are many bonafide economists who think that an SWR of 3% is almost fool proof.
You asked the question is there confirmation bias in FIRE. Is it REALLY as simple as save half for 10 years in low cost index funds and then live forever off the interest? The Monte Carlo model is a statistical means to test that question. As a well designed widely accepted model it has NO confirmation bias because the bias has been designed out of it. That is its feature. It doesn’t rely on bonafides, it relies on quantitative analysis. Financial “economists” are salesmen. They have an agenda to sell. That is the very definition of confirmation bias. If there is a quantifiable and measurable difference between the “bonafides” perspective and the proven mathematical model who is at fault? The model tells you the nature of failure, and allows you to plan against failure, the bonafides sells you opinion dressed up with lipstick. There is an inherent conflict of interest between the two but since the model is not a person it is not the one with a bias. If the economist matches the model in his opinion I would be more inclined to believe him. Suzie O hit the scene and pushed back against the narrative. The adherents of the narrative went crazy. She pushed back based on her experience with portfolio failure as a 30+ year financial adviser. She’s someone who has collected the letters describing failure. If the FIRE response isn’t the response of a biased system I don’t know what is.
If you think you can predict 50 years into the future using 4th grade math, have at it. I find the idea preposterous. According to the model 9/10 times your 4th grade math will be right under normal SOR. The model also predicts if you get the worst 3 years of SOR at the beginning of retirement ( for example 1973, 1974, 1975) Your chance of success drops to 1/2. You can be optimistic and say Yea but half the peeps succeeded! True Dat! Small comfort. Uncomplicated bypass surgery has a failure rate of 1/200 and a morbidity of 1/20. If your cardiac surgeon had a 1/2 success rate would you undergo the operation?
So many choices, which one to choose? Have so far to go, does it truly matter, can always choose differently tomorrow? I made some stupid choices earlier in my life, and some have worked out. Now, that I’m older and more educated, am I making better choices? Sometimes I wish there was someone who could say, definitively, this is bad and this is good, don’t do this, do this instead. Today I make the best choice I know how to, and hope it works out in the end. I mostly start with something I want to accomplish or gain, that would make my life more enjoyable. Then look at ways to achieve it. I look at the cost (desire, time, expertise and possibly financial cost), pay off (what will I gain), and check to see if it’s something I truly want to work toward, and for how many years. The options are limitless so do the best I can. For me, I have a “good enough” savings rate, and am working on my next goal, removing as many “snags” in my life as possible. I want simplicity and security, this is how I define Financial Independence today. I’m truly enjoying the journey, finally. It has been a struggle for many years. I’m on the road to Financial independence and wish more people would join us. The way someone gets there is a personal choice, in my opinion. Most “ways” have positives and negatives, choose your own poison, based on individual desires, strengths and weaknesses.
Amazing post. Honestly I have been feeling that the fire blogs are all becoming echo Chambers.
Thanks for speaking up. Well done.
We definitely have to be aware that there is a risk to all agreeing with eachother.