In the era of immediacy and globalised communication, there are many prolific commentators who proclaim themselves to be experts in possession of a miracle blueprint on how to manage your finances and investments properly. What should we make of this and how can you assess your own ability in this sphere? One element of the response can be found in your relationship to a key value: humility
Do you think of yourself as being plugged-in and extremely well informed? When it comes to making financial choices and investing your money, are you convinced that you are able to make the best decisions without the help of a financial expert? If the answer to this question is yes, have you taken the time to ask yourself what this level of self-confidence is based on?
Maybe you’ve been taking an interest in those new and rising stars in the biotechnology sector for some months, following the performance of cryptocurrencies via specialist platforms, or reading everything there is to know about those promising start-ups that are about to be listed. Is this really enough? While it is not the role of myLIFE to belittle your abilities, we want to encourage you to take the time to assess them properly. It is possible to invest wisely without any outside assistance, providing that we are able to properly assess our own abilities, and learn to source and chart the information on which we base our decisions.
“Ignorance more frequently begets confidence than does knowledge”, Charles Darwin
Learning is not necessarily knowing
When we become interested in a new subject, we can rapidly assimilate a lot of new information. But generally, our impression of our knowledge far exceeds our actual knowledge! As we believe that we are more competent than we actually are, the risk is that we are insufficiently cautious when evaluating the information that is available and taking our decisions. This may have dramatic consequences when it concerns our finances. As Charles Darwin said, “ignorance more frequently begets confidence than does knowledge”. It’s easy to think you are knowledgeable when you are unaware of your ignorance. An event in 1995 in the United States is a perfect illustration of this phenomenon.
The Dunning-Kruger effect
Just a few hours after robbing two banks in broad daylight and without any face covering, McArthur Wheeler was identified and arrested by the police who had simply viewed the surveillance cameras at the two establishments. When police officers showed him the video recordings, he seemed to be astonished that his face could be identified. He had been convinced that spraying his face with lemon juice had made him invisible to the cameras.
Based on this true story, two US psychology professors, Dunning and Kruger, started to become interested in the cognitive mechanisms related to the awareness of ability. They highlighted what is called the Dunning-Kruger effect, whereby the least competent people overestimate their own ability and are therefore unaware of the limits of their knowledge, whereas people with the best qualifications are aware of their limits and tend to underestimate their own ability. Having greater expertise and humility at their disposal, the most competent often take better decisions. And they don’t boast about it. Whereas the incompetent will shout about their supposed expertise to whoever will listen, the competent tend only to comment when it is pertinent.
A combination of expertise and humility is what helps those who are most competent to make the best decisions.
This is an important finding, since the Dunning-Kruger effect can be seen in many areas of daily life such as healthcare, education and finance, and not just in the anecdote cited above. So what should you do? Strive for humility and ensure that you have the information required to take a decision. And that’s where the problem arises!
When false information spreads faster than the truth
In our hyper-connected society, anyone can open a social media account and offer views that directly contradict those of an expert in the field. If we follow the Dunning-Kruger logic, the person communicating best and most often, and who has the most followers, is not necessarily the most competent (elsewhere, myLIFE has encouraged you to distrust the sheep effect).
During the COVID-19 pandemic, research platforms offered free access to any research with a close or more tenuous connection to the pandemic. During lockdown, some people whiled away the hours of isolation browsing this research, either in the original, or via the often fragmentary shares of these studies. This led some individuals to believe that they had become highly competent in virology after just a few days. Do you remember the video that went viral during the pandemic as its maker claimed that the COVID-19 virus had been created by the Institut Pasteur? By using the information made available on research platforms about the pandemic, the maker of this video seized on just two bits of information that were available: the term SARS-CoV and the fact that a patent had been filed. However, this term refers to an entire family of viruses, and filing a patent is standard procedure for an institute that hopes to eventually create a vaccine. Ultimately, the Institut Pasteur had indeed filed a patent in 2004, but in connection with the specific virus that was the cause of an epidemic in 2003.
The worry is that in our hyper-connected world saturated with information, researchers have shown that false information is often more believable, and spreads six times faster than real information due to numerous shares and re-shares. So before there is even time for the misinformation to be refuted, it will have been shared by millions of people, becoming difficult to stamp out; the doubt caused by the misinformation, this initial impression of truth, will tend to linger.
The amount of energy needed to refute bullshit is an order of magnitude larger than to produce it.
This is the well-known Brandolini law, also known as the bullshit asymmetry principle, whereby, “the amount of energy needed to refute bullshit is an order of magnitude larger than to produce it”. Here a little humility and discipline can help you avoid swallowing any old rubbish.
Humility, a sign of competence
When you are looking for investment information on your own, bear in mind that those who spend the most time publicising their successful investment plans are not necessarily the most competent. Be wary of supposed financial gurus on social media.
The most competent generally show greater humility and discretion. They won’t necessarily look to share their investment secrets with the highest possible number of people. If you are interested in very specific areas of investment, a better strategy is to take the time to approach a financial expert, who will be able to separate the misinformation and rumour from a truly good investment plan for you.
If you nevertheless decide to go it alone and carry out your own research, bear one key principle in mind: don’t skip reading the methodology section of a scientific paper or financial prospectus. The illusion of competence is mostly based on a belief that overrides methodical thinking. So if you are able to decipher the scientific methodology and the research protocol, you will be able to make up your own mind up about the solidity of the proposed theories. The same is true for the performance and risk-reward data explained in a financial prospectus. In contrast, if you are unable to understand these aspects, it may be preferable to show some humility, recognise the limits of your competence, and seek the assistance of an expert.
What are the key takeaways? The real problem is not a lack of competence in a particular area, but our inability to see the limits of our knowledge. In response to this, humility will always be our best ally; it will help us make the right strategic investment decisions and recognise if the help of a specialist is necessary.