In 1913, on the eve of World War I, the French General Staff had collected enough information on the German use of reserves as active troops to make it impossible for them to be ignorant of this crucial information. But the French military planners persuaded themselves that the Germans only planned to use these reserve troops for siege and occupation and not as part of the attack force. The possibility of the Germans attacking through Belgium would stretch the German troops so thin that the French saw no need to prepare a Belgian defense, or so they erroneously concluded.

The French military planners’ inability to adapt to a changing reality reflects the human tendency to see what we expect to see.  I was recently given a copy of the Psychology for Intelligence Analysis from the CIA’s Center for the Study of Intelligence (no cloak-and-dagger, it’s readily available on the CIA Web site). Intelligence analysts, according to the report, have a set of assumptions about the people and the processes of government in any given foreign country. At times, a new analyst will give a more accurate interpretation of the data than a seasoned veteran. Set patterns of expectations tell the more experienced analysts, subconsciously, what to look for, what is important, and how to interpret what is seen.  These expectations form a mind-set that pre-disposes them to think in certain ways.

Investors face the same mental challenges that confronted the French military planners 100 years ago and that confound CIA analysts today. Once an investment viewpoint is formed, new data points are filtered through a lens that conforms to an existing hypothesis. For example, if I think that stocks are a great value, I’ll interpret strong economic news as supportive to my position. However, if I think that stocks are overvalued, I’ll interpret the same good economic news as supportive of this point of view, because interest rates will go up and that will hurt stocks. I’m not suggesting that you should flip flop and change your opinion with every blip of static; rather, I’m suggesting that you should keep an open mind.

The most common example of “seeing what you expect (or want) to see” is evident when an individual holds onto a losing investment. The goal of making a profit is long gone, but a new strategy develops: hold on until the investment reaches “break even.”  Sometimes that’s the right strategy, but more often than not, the ego says “I can’t admit that I was wrong.” A little humility goes a long way in the world of investing.

Successful investors learn to leave their ego at the door. Nobody is always right; the key is to manage risk intelligently so that mistakes remain small. The first step is to wipe the slate clean each day and try to see the world the way it is, not the way we wish it to be.

Advisors, meanwhile, face challenges above and beyond that of individual investors. Telling a client that you are wrong can feel like an admission of weakness, or incompetence. Instead of having what may loom in the advisor’s mind as an awkward discussion, the tendency is to avoid the situation altogether. Worse, the advisor may avoid all contact with the client.

My experience has been that clients are willing to accept an honest mistake. The one thing they really hate is a lack of communication. The key is to view an honest evaluation as a core strength, and convey that to the client when the situation warrants. Your client relationship is too valuable to settle for less.

Frank Jaffe is a certified financial planner with the wealth management firm of Access Wealth Planning in Roseland, NJ.