Stoic Investing

Human Misjudgment : Authority

Authority, authority!” they shout

Whose minds, not large enough to hold a doubt,

Some chance opinion ever entertain,

By dogma billeted upon their brain.

~ Ambroce Bierce

There is one thing we all have been taught from very beginning and that is to accept what our elders tell us; to accept their authority.

To do otherwise was considered to be an act of indiscipline and something that needs to be corrected.

The reason is well understood. At a young age, when our minds are not fully developed and we are not well-informed, relying on elderly wisdom served us extremely well.

In a large number of activities, relying on authorities or experts is a wise thing to do.

You would not fight your own legal cases, repair your own car or take medicines by yourself. You would refer to your lawyer, mechanic or doctor for those needs and it is wise to do so.

Most of the human endeavors are complex and require in-depth study to master them, and referring to experts is often quick and safe. But this psychological tendency to listen to authority figures or experts also has a flip side.

Let’s see how this psychological tendency plays against us.

I can’t think of any bias which hasn’t been exploited by the marketers and advertisers. This one is no exception.

One sees people dressed as doctors recommending tooth pastes, healthy looking actors promoting sugar-free products and so on.

It is important to note here that the people one see are not real doctors and viewers are aware of that. Despite that, just the appearances give them the authority enough to have an impression on the viewer’s minds.

Religious bodies and cults have, over the years, used this psychology to control and guide the followers by appointing ‘heads’ and ‘gurus’ who are considered authority figures and hence are not to be questioned.

They also realize the importance to ‘discipline’ the people who do question their authority.

Investing and authority

Investors also have this tendency to agree with every word of few authority figures.

First, there are so called ‘experts’ who might not have any credible record but do not hesitate for a second to give their sure shot bets on media channels.

Then there are the super-investors with brilliant investment records. Even though it’s wise to listen to them, taking every word as sacrosanct is a mistake most investors are guilty of.

According to me, the most crucial thing to appreciate in this psychological bias is the extent to which it plays it role.

Most people feel that they have control over the point where they will stop listening or following the authority, but history have proven otherwise.

Does this tendency have the power to absolutely corrupt the thinking process of individuals? A question on similar lines was answered by a Yale university professor, Stanley Milgram.

He devised an experiment that arguably is the most important experiment in social psychology.

During the trial of the Nazis, he was confronted with the following question – “Was it that Eichmann and his accomplices in the Holocaust had mutual intent, in at least with regard to the goals of the Holocaust?”

Before we go any further, it’s imperative that we see an enactment of this experiment (Courtesy BBC). Please see the video below (or click here to view).

The results of this experiment were shocking. An astonishing 65% people went on to press the last button of deadly 450 volts, even though they were uncomfortable with it, simply because they were asked to do so by the professor (see the end of the video where they explain their reasons).

Milgram concluded that it could have been that the millions of accomplices in the Nazis camp were merely following orders, despite violating their deepest moral beliefs.

For investors, Milgram’s experiment also provides an insight into the focus of major successful investors on management quality.

They understand that people often do things as they are directed from the top, and hence the moral and ethical top management usually leads to a similar culture for the entire organization and reverse is true for unethical top managements.

Certainly not everybody was unethically inclined in the Enrons of the world. So investing in ethical managements acts a powerful antidote.

Think before you…

Thinking is a tough activity. It requires effort and time and most people are comfortable if somebody else do the thinking for them.

In some cases, it works fine. But in others, there can be major problems.

These problems arise for two main reasons, according to Robert Cialdini. Firstly, when the expert or the authority figure is wrong and secondly, when there are conflicts of interests and the expert acts wrongly.

So questioning the authority is a powerful antidote for this tendency. When confronted with a situation where you find yourself agreeing with an expert, pause and question it.

Ask yourself two important questions…

  1. Is this authority truly an expert? This question helps to enquire the credibility of the expert.
  2. How truthful can we expect this expert to be? This question should help us understand his incentives, interests before we give any credence to his words.

Even if we get satisfactory answers to both the questions above, it’s imperative to remember that experts can be wrong and badly too.

A useful guide to getting the answer to the first question comes from a book, Expert Political Judgment: How Good Is It? How Can We Know?, by Philip E. Tetlock, a political psychology professor at Haas Business School.

He was inspired from an essay, ‘The Hedgehog and the Fox’ by a popular philosopher, Isaiah Berlin who classified experts into two categories – hedgehog and fox.

This is what Tetlock explains in an interview…

The most important factor was not how much education or experience the experts had but how they thought. You know the famous line that [philosopher] Isaiah Berlin borrowed from a Greek poet, “The fox knows many things, but the hedgehog knows one big thing”?
The better forecasters were like Berlin’s foxes: self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability.
The less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs.

The humble and self critical experts have usually higher success rates in their predictions but because of their very nature, very few of them are able to call extreme (crisis) situations.

Hedgehogs are usually better at that but with an extremely poor success rates. According to Berlin…

In our research, the hedgehogs who get out front don’t tend to stay out front very long. They often overshoot.
For example, among the few who correctly called the fall of the Soviet Union were what I call ethno-nationalist fundamentalists, who believed that multi-ethnic nations were likely to be torn apart. They were spectacularly right with Yugoslavia and the Soviet Union. But they also expected Nigeria, India and Canada to disintegrate. That’s how it is with hedgehogs: You get spectacular hits but lots of false alarms.

I find this idea very useful when listening to the experts and while deciding whom to give any credence to.

Another powerful antidote against this tendency is to seek opinions from more than one expert to diversify the risk of getting it wrong from one.

I find people doing it almost intuitively when it comes to medical opinions, but not in other matters (like investing).

In the information age, technology can be used very effectively to bridge the information gap of the experts and empower us to take informed decisions without getting swayed by the authorities.

And lastly, I have learnt a great deal from the scientific community in its attempt to avoid this ‘authority- misinfluence’ tendency.

The finding of any scientific experiment is not acknowledged because of the reputation of the scientist or his past achievements but is thoroughly reviewed by other scientists and the methods are questioned by various groups.

This makes sure that each idea and finding is accepted on its own merit and not on the authority of the scientist and each idea is challenged before it is accepted.

Benjamin Franklin appealed to citizens by saying – “It is the first duty of every citizen to question authority.”

I would just reiterate the request in generic language. It is imperative to admire people and learn from the best in the business.

One should learn the tricks of the trade, the work ethics and various point of views but never should one except words of any one without proper enquiry and reasoning, no matter who the expert.

Just for example sake, one should not decide ‘not to buy gold’ because Warren Buffett says so or ‘to buy gold’ because David Einhorn says so.

One should decide by taking the important facts considered by both the ‘experts’, any other relevant information and one’s own judgment of various factors to take the final call.

Have you been mis-influenced by authorities in any field? Do share in the Comments section below for the benefit of other readers.

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