Do we suffer from an “expert” bias?
Photo: Christopher Michael. Source: Flikr
We tend to trust the views of experts, especially when it’s about something we haven’t experienced ourselves. If I haven’t travelled to Antarctica, I’ll generally trust someone who’s actually been there – even if they travelled to the islands on the Antarctic Peninsula, and I’m headed for the South Pole – over 1500 miles away.
This is natural. When we’re in unfamiliar territory, we want a guide. We look for someone to give us direction and clarity. It’s a version of the “halo effect”: if we have a good feeling about a person in one area, we put a “halo” around other more ambiguous aspects of their lives. If someone looks good, we may assume that they’re successful as well. We then notice evidence that confirms our outlook. We play “follow the leader.”
Photo: Christopher Michael. Source: Wikipedia
This can be dangerous. Just because someone is an expert in one area doesn’t make them experts everywhere. Linus Pauling received multiple Nobel Prizes (Chemistry, Peace), but then he went off the rails and started advocating mega-doses of Vitamin C for everything from colds to cancer to heart disease. People who followed this medical advice ended up spending time, money, and energy on an approach later shown to have a marginal effect.
It’s also dangerous when it comes to finance. There’s a lot of quantitative work being done today by big firms filled with PhDs that’s accepted by the financial press as the latest key to understanding (and outperforming) the markets. This research can be filled with partial differential equations and multivariate matrices. We often don’t understand the math, but we’re persuaded by the writing style of the author’s picture or the reputation of the site where we find it. We extend a halo around the work, and accept their conclusions. We even invest on these premises. Sometimes it works out.
Black-Scholes Model. Source: Wikipedia
Published research in finance is often like a back-test. It’s rarely published unless it supports the sponsor’s current views or existing products. Thus, Jack Bogle touts indexing, Fidelity encourages using easily accessible mutual funds, and TD and other brokers encourage stock-picking. For my own part, I support an all-of-the-above approach, building portfolios like I would a dinner at a Swedish smorgasbord: a little of this, a little of that. Everyone is human, and entitled to market their own business.
Just be aware of their biases, and don’t believe everything you read. We’re all human. If you don’t understand the process behind something, it never hurts to be a little skeptical.
Douglas R. Tengdin, CFA