Shorting Stocks Is Like Being Under Interrogation

In an interview with Barry Ritholtz for the Bloomberg radio segment Masters in Business, Chanos said that since short sellers are constantly being told that they're wrong, they need to be able to withhold information, and ignore superfluous market noise.

"When I come in every day, we have 50 stocks in the US, another 40 globally, I can pretty much be sure that 20% of my names will have a research note out, a buy recommendation, earnings estimate raised, CEO and Bloomberg, whatever the case might be. And most of that is noise. But it's the noise that most people in the market are used to," Chanos said. "And I think that not everyone has the ability to simply drown that out, and say, 'Okay that's all well and good, but that's in the price of the stock and we know that, and the facts that I have are very important, and the market doesn't really know that or appreciate how important they are.'"

Chanos, who runs Kynikos Associates, is well-known for his ability to research and spot fraudulent companies. He first rose to prominence exposing insurance fraud in Baldwin United back in 1982. He was also one of the first to call out Enron before it collapsed.

"I think the research is the same, and I think that good research should be taught both long and short side and it should be the same," he said. "The ability to deal with the noise, the swing factors, the volatility, I think that's a different attribute."

When Chanos first started shorting stocks, he thought it would be the mirror image of going long. Now he believes that much of it is rooted in behavioral finance.

"I think we're all, by and large, the listeners of this show and others, are the product of positive reinforcement cycles. And most people's rational decision making, studies have shown, breaks down in an environment of negative reinforcement," he said.

You can listen to the entire interview with Chanos here >>