Cognitive Biases Part 3- Expert Bias

 

Western society has evolved into a society of experts. It’s probably our greatest export. As investors we lean on experts of various shapes and stripes like equity analysts, economists, market strategists, financial advisers, and investment coaches to validate, reinforce, and confirm certainty in an uncertain world.

We make a lot of decisions and often defer or outsource our decision making based on what experts think. The groupthink and herding behaviour which has permeated many of our social and professional circles heightened this need. A 24 hour business news cycle also helps. Punditry which has historically been reserved to political debates has gone mainstream. You can’t go two steps without bumping into someone who claims to be an expert on XYZ. Punditry has indeed become a cottage industry and with experts in such constant demand, you think they would provide us with that certainty we all seek.  Unfortunately the research is telling us, we’re looking to the wrong people. The reality is that experts, especially those who forecast or predict things do no better than the average person.

All Hail the "Articulate Incompetents"

Jason Zweig in his book, Your Money and Your Brain, dived into the concept of experts and came out with some general conclusions and observations.

  • The more confident an expert sounds, the more likely he/she is to be believed by viewers
  • Experts who acknowledge that the future is inherently unknowable, are perceived as being uncertain and thus less trustworthy (Isaiah Berlin: Hedgehog vs Fox)
  • The more self-confident an expert appears, the worse their track record is likely to be.
  • Forecasters who get a single big outlier correct are more than likely to underperform the rest of the time (e.g. Elaine Garzarelli, Meredith Whitney, Nassem Taleb).

Experts are not available because they have nothing better to do. They project their views because ultimately they are trying to influence us, be it to buy their products or services or to increase their visibility.

Now does this mean we should tune out all experts and pundits? I say we shouldn’t because experts can provide an insightful source of consensus and contrarian perspectives.  Experts are not necessarily dumb people. They do possess a unique skillset that can be utilized. We should always listen to what they have to say, especially for things that they don’t’ like as often these things that are out of favour with experts have the potential to be a backdoor entrance into a future opportunity. Whenever I hear a financial analyst or economist speak, I try to pay attention to what stocks they don’t like or what direction the economy is heading because those negative sentiments can turn out to be tomorrow’s winners.

I personally could be slotted as one of these experts as I do express my views in a public domain via traditional and now digital media. I think this could be construed as true up to a point. I try to spread knowledge about mechanical and behavioural knowledge about investing. Where I stop is when it comes to predicting or recommending stocks to buy or sell. As an investment coach, I do not provide recommendations or advice on what stocks to buy or sell. 

Experts and soothsayers will always clog our radio, TV, and wifi airwaves. They are not going away anytime soon. The will be constantly trying to influence our decision making. By being aware of their capabilities as well as their agenda and limitations, an investor can use them tactically in a contrarian way to enhance their investing prowess.