The Three Amigos -- A True Story

Thirty years ago there were three friends who lived in Boston.  They were pursuing law school and post-graduate education at some of the many fine educational institutions in that town.  The three amigos were intellectuals;  they enjoyed attending Harvard lectures on many topics.  One of them recently confided that this was one of the best aspects about living in a university community, even better than actual classes.

We suspect that most readers of "A Dash" may not see the excitement of this lifestyle, but bear with us.  We have been there and shared those experiences.  More importantly, that is not the point.

The three friends included a range of expertise:  a sociologist, an economist, and a political theorist.  One night they agreed to attend a lecture by the renowned Professor X.  After the presentation, they had their usual debriefing over -- ahem -- coffee.

The economics grad student raved about the lecture.  He thought that the analysis was great -- except for the segments dealing with economics.

The sociologist was similarly enthusiastic, but with a reservation.  He felt that the lecturer "knew almost nothing" about sociology.

The political theorist --  but by now we all know what he thought.

Conclusion

In articles of this type we normally like to allow readers to draw their own conclusions about the application to stocks and investments.  This topic is a little different.

We feel the need to sharpen the point a bit.  Much of the argument and information we see in daily reading is presented in a fashion that is illusory.  The reader is offered something represented as a  complete picture.  It sounds great.  It is convincing.

There are two key problems:

1. Many readers lack the specific expertise required to evaluate the information.
2. They do not know it.

The problem is that people do not respect the knowledge that others have gained from years of study and experience.  They think that because they are intelligent, they can understand and interpret any information.  Not understanding the limits to expertise is a costly mistake.

It is a sad thing.  Intelligent investors, doing their homework, reading the leading Internet sites, reading the New York Times and watching CNBC, can easily reach expensive conclusions.

A little knowledge is a dangerous thing.

Comments

[TheDebtDarling]

This is absolutely correct. A little knowledge, especially when it comes to investing your money, can be a huge mistake.

[Genomik]

When I saw John Stewart just roasting the bow tie host of Crossfire it reminded me of this (watch it on Youtube - hilareous). He said that Crossfire exemplified all that is wrong with Democracy cos they get two opposing viewpoints that each need to stake out a extreme position and argue for them whereas the true answer (in politics) is usually in the middle. Much business analysis seems similar - bull and bear. So where are the confidence limits set? That is hard to answer, some ranges should be narrow and other large. Maybe a goal should be for individuals to assess if the ranges on a topic should be narrow or broad. History is another topic that people often use that I think is useless. The future often does not follow from the past. Check out the Black Swan for some bias trippin.

Maybe there needs to be a comedy show like the Daily show for business. CNBC....Fox....others.... there's an idea.

[John Bougearel]

Your point is well taken about the reader's capacity for misinterpretation and the limits of the experts ability to communicate insights garnered from years of experience and study.

[oldprof]

I listen to NPR and I read the NYT and the Washington Post. I find myself increasingly distressed by the investment recommendations from these sources....

Jeff

[Bill aka NO DooDahs!]

Trusting expertise blindly is a good way to wind up paying for the replacement of your "muffler bearings."

I could also make a list of things that experts were wrong about throughout history - but I don't have enough time.

There is a balance that must be struck, not all expertise comes with designations, and not all designations come with expertise.

[Tim]

Jeff, you are on a streak this week. Another though provoking post. My background is in sales and as much as buyers think rationally about buying something, the final decision is primarily an emotional decision. I think most of our investment decisions are emotional and we look for information to back up our "feelings" on the securities we buy and sell. Then we factor in the fear and greed of the market as a whole and it is tough for any individual to stay rational about these decisions. Keep up the good work, I "feel" some good momentum starting here with the info you are putting out and I hope the blog reading investors are catching.

[RB]

Practically everyone is a climatologist too. The first time I did a test similar to this one
http://advisors.loringward.com/invEmotionsLit/OverconfidenceBias.pdf
I got all questions wrong. At least on this one, I answered six out of ten correctly.
On the next one, I think I will have calibrated myself further for confidence intervals :).