I recently had a chance to interview the behavioral finance consultant Daniel Crosby for another site.
I was excited about interviewing Crosby, because on a regular basis, I see people who are their own worst enemies when it comes to financial health. People who stay in cash because they think it's "safe," people who support adult children to their own detriment, people who take Social Security too early and people with hopelessly disorganized stock and bond portfolios which carry too much risk for too little return.
This is the biggest change since I became a licensed advisor and fiduciary, rather than simply showing people how to use technical analysis to trade. In this role, I see the real-life situations. It's not always pretty. And I quickly realized that it's much less about the investments and much more about your approach to personal finance and planning.
-- RealMoney Pro's Doug Kass also has thoughts on why investors should keep clear of the consensus.
In the interview, Crosby mentioned the problem of overconfidence. He specifically discussed pundits who make investing predictions in the mass media:
Must Read: Kass: Keep Clear of the Consensus
"Philip Tetlock and others have shown that there is an inverse relationship between self-confidence of predictions and actual predictive accuracy, so many financial talking heads are providing a false sense of security. Real surety is had by taking an appropriately long view of your financial life and relying on a personal expert rather than someone who is trying to craft investment wisdom for the masses."
I understand the appeal of the ever-changing landscape of investment advice. I'm in the media, too, and I know that click-bait headlines with highly promising or fear-based verbiage gets people interested. It's the same as the TV segments on how to "play" the news event of the day (like it's Vegas). None of this is in your interest. As Crosby points out, the media aren't in the business of advising you; they are in the business of entertaining. Don't confuse the two.
But consider the overconfidence of the predictors and how absurd the "prediction industry" is. A few years ago, when I was auditioning for a show (which never got produced) at one of the big financial networks, one of the well-known hosts asked my prediction of the S&P 500. My answer was not really TV-friendly. I simply told him that I don't make predictions. He bristled a bit, and said, "Kate, people like nice round numbers."
But why should it matter at all what anybody thinks about market direction?
The author who Crosby quoted, Philip Tetlock, is a professor at the University of Pennsylvania and a noted author on the topic of predictions. In 2005, The New Yorker published an article that discussed, in some depth, a book Tetlock published in 2005.
Louis Menand, the New Yorker author, observed this about Tetlock's research: "The accuracy of an expert's predictions actually has an inverse relationship to his or her self-confidence, renown, and, beyond a certain point, depth of knowledge."
In other words, there is plenty of plain wrong, overconfident predicting out there.
So as Crosby notes, people often feel secure when listening to experts' predictions on what is supposed to happen in the future. But that type of anchoring isn't necessarily going to help you become a better investor.