“Oceania was at war with Eastasia: Oceania had always been at war with Eastasia. A large part of the political literature of five years was now completely obsolete. Reports and records of all kinds, newspapers, books, pamphlets, films, sound-tracks, photographs—all had to be rectified at lightning speed. Although no directive was ever issued, it was known that the chiefs of the Department intended that within one week no reference to the war with Eurasia, or the alliance with Eastasia, should remain in existence anywhere. The work was overwhelming, all the more so because the processes that it involved could not be called by their true names. Everyone in the Records Department worked eighteen hours in the twenty-four, with two three-hour snatches of sleep… What was worst of all was that the work was by no means purely mechanical. Often it was enough merely to substitute one name for another, but any detailed report of events demanded care and imagination. Even the geographical knowledge that one needed in transferring the war from one part of the world to another was considerable… In so far as he had time to remember it, he was not troubled by the fact that every word he murmured into the speakwrite, every stroke of his ink-pencil, was a deliberate lie. He was as anxious as anyone else in the Department that the forgery should be perfect. On the morning of the sixth day the dribble of cylinders slowed down. For as much as half an hour nothing came out of the tube; then one more cylinder, then nothing. Everywhere at about the same time the work was easing off. A deep and as it were secret sigh went through the Department. A mighty deed, which could never be mentioned, had been achieved. It was now impossible for any human being to prove by documentary evidence that the war with Eurasia had ever happened.”
— George Orwell, 1984: Part 2 Section 9
The novel 1984 has become so synonymous with brutal totalitarianism that even those who haven’t read it — or who skimmed through it in high school, which may amount to the same thing — immediately identify Winston’s work in the Ministry of Truth as serving the authoritarian regime. However, another and even more chilling reading is that this is the work our own minds perform all the time in response to everyday cognitive dissonance.
Cognitive what?
Here are two useful definitions:
Cognitive dissonance [is] the mental conflict that occurs when beliefs or assumptions are contradicted by new information. The unease or tension that the conflict arouses in people is relieved by one of several defensive maneuvers: they reject, explain away, or avoid the new information; persuade themselves that no conflict really exists; reconcile the differences; or resort to any other defensive means of preserving stability or order in their conceptions of the world and of themselves. — Encylopaedia Britannica
Cognitive dissonance is the discomfort of self-image colliding with reality. — Psychology Today
Everybody’s doing it.
The impulse to resolve cognitive dissonance is so powerful and so instinctive that as you read the definitions above you probably thought of someone else rather than yourself.
Like Winston and his coworkers, your mind immediately set to work, without consciously declaring the decision, to eliminate any evidence of disagreement between your self-image and the available facts.
We all do this, all the time.
Like, for example, when we tell ourselves that we are not prejudiced. Everyone carries unconscious biases, unexamined and unacknowledged, but actively figuring in our daily decisions and actions.
Or that markets (and those of us participating in them) behave rationally. As individuals, we make decisions emotionally, instinctively, subjectively, based on any number of factors that have little or nothing to do with rational analysis of objective information. Grouped together, we sometimes balance one another, but just as often we become collectively even more irrational.
Or that we operate within a meritocracy. Health wealth, and opportunity are in some cases distributed according to talent, skill, or effort, but more often according to accidents of birth (gender, race, zip code) and networks (whom we know).
In short, we all carry seductive beliefs that are readily refuted by available evidence which we choose to reject.
As the Britannica definition points out, these narratives about ourselves and our role in society serve multiple functions, not least of which is to provide us a sense of stability and security. When we are confronted with facts that threaten that stability and security, we tend to find some way to defuse the internal conflict.
Like Winston, we destroy or reject evidence, rewrite our history, and otherwise avoid engaging any awareness that we are actively deceiving ourselves. Our internal Ministry of Truth is not interested in truth, of course: it is interested in being unassailably right.
“That can’t possibly be true.”
Just as in 1984, encountering contradictory data often proves counterproductive for changing our closely held beliefs, since — in absence of a conscious and intentional effort to examine the data and revise our self-image or worldview — it just gives all our well-trained and hardworking defenses something to do. We reject data we don’t like. We distort and reinterpret the evidence to fit. We change the subject or reframe the story to avoid discrepancies.
Again, just like Winston and his colleagues in 1984, the act of discarding or rejecting unsettling evidence actually imparts a deeply gratifying sense of satisfaction, even righteousness. We often harden our beliefs in response to disproof. Holding firm against evidence that threatens our preferred beliefs actually emboldens us to hold those counterfactual beliefs even more strongly. See, for example, MinnPost, The Atlantic, The Washington Post, Scientific American.
Just the facts, ma’am.
President John Adams is reported to have quipped, Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.
Fortunately, we have a choice. We can choose to be subject to our wishes, inclinations, or passions. Or we can choose to face facts. [Yes, Matrix fans.] We can choose to look at the data, and to upgrade the fidelity of our self-image and worldview.
What does this have to do with investing?
I’m glad you asked — and that you’re still reading! We have lots of unsubstantiated, and in fact demonstrably false, beliefs about investing. Starting with the three above — we are not prejudiced, markets behave rationally, and we operate within a meritocracy — you can probably scribble off several more within just a few minutes of sober reflection.
Here are just a few recent fact-based challenges to these and other widely held investing-related beliefs:
Project Diane 2018 — digital undivided
105 Black & Latino Venture Backed Startups That Have Raised $1MM+ — Harlem Capital
Inequality As A Systemic Risk — Green Alpha Advisors
Woman and Minority-Owned Private Equity Firms — Fairview Capital
Inertia vs Math — Javier Saade
Digitally Black: How Brands Can Culturally Connect — CultureBanx
Why Women-Owned Startups Are A Better Bet — BCG
Will Female-Led ‘Zebras’ Counter Tech’s Unicorn Obsession?— Business.com
Why Not the Best? — NexTier Consulting Solutions
Quick Explainers — Gender and the Economy, Rotman School of Management
“Courage, dear heart.” — C.S. Lewis
Many people are simply in denial… when people have defended a theory all their lives, it requires a lot of courage to say, ‘I’m wrong.’ — Chantal Mouffe, as quoted by The Guardian.
It is very difficult to revise or retire long-held beliefs. But keeping those discredited beliefs also imposes a cost. Psychology Today states that doubling down on a self-image that is disproven by the facts induces feelings of fear, guilt, and shame. But conversely: The only thing that relieves guilt and shame for violating a value is investing more energy in the value. In other words, we do best for ourselves when we revise false beliefs (and subsequent actions) to square them with the facts and our values.
You value your self-image as an ethical, rational investor. Wherever possible, invest in that self-image — and make it true! — by discarding old unexamined thought habits and incorporating, rather than avoiding, the stubborn facts.
Accepting that you carry and act on unconscious biases just like the rest of us, that markets are not nearly as rational as we like to pretend they are, and that genius is evenly distributed but opportunity is not is not only good for your well-being (as you upgrade those unhealthy unconscious biases to consciously examined beliefs based solidly in evidence) but also enables you to see whole new frontiers of attractive investment opportunities that were previously obscured by those old, erroneous beliefs.
This is not easy, as we’ve discussed. Questioning our chosen beliefs is uncomfortable, especially when those beliefs protect us from self-examination, discomfort, or doubt. But in squaring our beliefs with the facts we directly benefit ourselves by enabling better decision-making now, and reducing cognitive dissonance imposed by our internal tyrannies in future.
And it’s not a once-and-done exercise, as we can attest. So breathe. Practice empathy for yourself and others. But don’t stop there. Take courage and press on: dig further into the facts; interrogate your assumptions; discard unsound proxies and reinforce critical faculties for reducing prejudice, increasing rationality, and valuing merit.
Invest in your values.
There are lots of ways to get started. See recommendations from Cornerstone Capital, Village Capital and The Aspen Institute, among others.
For our part, Reinventure Capital is working from the impact investing playbook Ed originally pioneered in the 1980s and 1990s, investing in overlooked, undervalued founders to grow profitable, value-creating enterprises.
Specifically, we are focused on deploying equity and debt capital in expansion stage (breakeven or so) companies led by people of color and women, across the US. The Reinventure approach flies against at least three widely-held conventional wisdoms about venture capital investing, in addition to the general beliefs above. But it fits the facts.
Moreover, not only did Ed’s former portfolio meet or exceed all of its impact objectives, but it returned 32% IRR, thereby establishing another stubborn fact.*
So we know from firsthand experience that although — and to some degree because — it triggers all kinds of cognitive dissonance, it is indeed possible to generate top-tier returns by investing for social, racial, and gender equity. We’re firmly committed to that value.
Where are you engaging cognitive dissonance?
What values do you hold dear, and what evidence-defying beliefs or assumptions vie to obstruct you from investing in your values and the facts? What practices and resources have you found helpful to keep you firmly grounded in your values and the facts?
Most importantly, how might we join forces for good?
Please share! Or, for that matter, why not take the conversation to your network?
*While there’s no such thing as a guarantee in investing and no one can reliably predict the future, Ed’s prior track record provides direct evidence that it is indeed possible to consistently invest for both financial returns and social value creation. If you are an accredited investor and would like to learn more about investments that can advance social, racial, and gender equity by supporting high-value companies led by women and/or people of color, please contact us to start that conversation.
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