In 1906, Sir Francis Galton set off to prove that regular people were more than blithering idiots. He went to the West of England Fat Stock and Poultry Exhibition in Plymouth where he came across the competition guessing the weight of an ox. The person who guessed closest to the actual weight of the ox would win it, slaughtered and dressed. Some guesses from butchers and breeders were close, but others were absurdly off. This competition became the basis for his point.
Sir Francis Galton, a British scientist, statistician, explorer, and anthropologist, did research in human intelligence and selective mating (no, he wasn’t the founder of Match.com!). Galton borrowed the entry tickets, added all 787 legible ones, including the ludicrous guesses, and took the mean. The actual weight of the ox was 1,198 pounds, and the average of all the guesses was 1,197 pounds, far closer than any individual entry. The collective wisdom of the crowd nailed it! “The result seems more creditable to the trustworthiness of a democratic judgement than might have been suspected” wrote Galton.[i]
Remember the game show Who Wants to be a Millionaire where contestants could use one of their four lifelines to poll the audience and another to “phone a friend,” the supposed smartest person they knew, with “superior general knowledge?” Statistical analysis showed that the “experts” were right just under 65% of the time, but the random audience on any given day was right 91% of the time.[ii]
Throughout history, other “experts” have stated their “conclusions” and we now know what happened when they presumed upon the future. Here are a few examples:
- Thomas Watson, president of IBM, 1943, “I think there is a world market for maybe five computers.” [iii]
- Decca Records executive Dick Rowe rejecting the Beatles, 1962, “we don’t like your boys’ sound. Groups of four guitarists are on the way out.”[iv]
- The mid-1970s response to Debbi Fields’ idea of starting Mrs. Fields’ Cookies, “A cookie store is a bad idea. Besides, the market research reports say America likes crispy cookies, not soft and chewy cookies like you make.”[v]
- Irving Fisher, Professor of Economics at Yale University, alleging on Oct. 17, 1929, “Stocks have reached what looks like a permanently high plateau.” On Thursday, October 24, 1929, panic struck Wall Street, and stock values plummeted $6 billion before trading leveled off in the late afternoon. On Nov. 14, 1929, Professor Fisher went on to utter, “The end of the decline of the Stock Market will . . . probably not be long, only a few more days at the most.” [vi]
I could report on how much the Davos “magi” at the World Economic Forum have gotten wrong over the years or how recent health and government officials emphatically stated their conclusions about the coronavirus and based rigid “science” policies on it, most of which have been debunked by the high-quality, reputable meta-analyses of Cochrane,[vii] [viii] [ix] the UK-based nonprofit, but I think you get the point. “Experts,” including multitudes of TV personalities, have given their “advice” only to be proven wrong later.
It’s no different in the financial world. I have heard that the US dollar will collapse, a major recession is just around the corner, buy Bitcoin, put your money in gold, don’t pay off your mortgage, buy the XYZ stock since it is greatly undervalued and is the next Microsoft, don’t use credit cards, you don’t need an advisor, you can invest on your own … and the list goes on. While some “conclusions” may quickly be seen as irrational and/or based on wacky conspiracy theories, only time will tell which are true and which aren’t. And often there is more “truth” in the collective wisdom of the masses than any one technocrat or bureaucrat, or small group thereof.
What should you do when it comes to evaluating financial and investing advice? Without being exhaustive, here are 4 action steps to take when you hear something from an “expert:”
1. Ask questions – What is the source of the information? Is it credible? Have their past predictions been trustworthy? What is their worldview? How do they define truth? What do they have to gain by insisting you follow their “advice?” What do others have to say about this? Are they an outlier?
2. Compare sources – Don’t just have confirmation bias and take in only news or information from one “expert” or source you like. What are contrary opinions and what are they basing that on? What is the “average opinion” or judgement of “the group?” It may not be the opinion and/or judgement of everyone in the group, but actually the group’s aggregated or collective intelligence leads to a higher level of precision, something called “crowd wisdom.”[x] [xi] Centuries ago, wise king Solomon advised that wisdom and safety can come from a multitude of counselors.[xii]
3. Separate facts from speculations – Nobody knows the future, and to act like he or she does, with certainty, is pure arrogance. It is better to follow historically tried and true principles than to go, for example, “all in” on a speculative “tip.” Markets and the economy are more complex than one can imagine; that is why predicting and investing in them is not an exact science. Human emotions and behavior affect the outcomes, making any quantitative or precise forecasts impossible.
4. Think through the impact – When the “talking heads” or the “smartest person in the room” try to convince you of something, give pause and think about how that will positively or negatively impact your situation if you follow or don’t follow their recommendations. Is the upside gain worth the downside risk? We never seem to have all the information we desire, and we sometimes can’t do the cost-benefit analysis we’d like. Also, take time to acknowledge how your emotions (e.g., fear, greed) are impacting your judgement. Slowing down the decision-making process will help.
The “experts” are rarely all knowing about what the future holds, and only time will prove the legitimacy of their claims. As we are bombarded with tips, information, advice, recommendations, etc., just be cautious about what you believe. But then again, what do I know?!?!?
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