Swedroe: Avoid The Famous & Authoritative

If you’re going to listen to experts, make sure it’s the right ones.

Reviewed by: Larry Swedroe
Edited by: Larry Swedroe

In my last post, I discussed how we tend to crave certainty, even when we know, logically, that it doesn’t exist. With investing, it’s a desire to believe that there’s someone who can protect us from bear markets and the devastating losses that can result. That leads to what we can call the “Wizard of Oz effect.”


We sometimes come under the spell of “wizards,” authoritative voices whose words we are “trained” to take as truths. We deeply want to believe that we can control things, because otherwise, as Woody Allen put it, “life is scarier.” Yet political scientist Philip Tetlock demonstrated in his outstanding book, “Expert Political Judgment,” that even professional economic forecasters don’t make accurate predictions with any persistence.


I previously explored this concept from Tetlock in the March/April 2012 issue of the Journal of Indexes, but it seems appropriate to revisit my points. To start, Tetlock found the so-called experts who make prediction their business (those who appear as experts on television and talk radio, are quoted in the press and who advise governments and businesses) are actually no better at it than the proverbial chimps throwing darts.


Foxes Vs. Hedgehogs

He divided forecasters into two general categories: “foxes,” who draw on a wide variety of experiences and for whom the world cannot be boiled down to a single idea; and “hedgehogs,” who view the world through the lens of a single defining idea. The following are some of Tetlock’s most interesting findings:


  • What distinguishes the worst forecasters from the not-so-bad forecasters is that, while hedgehogs are more confident, they are wrong more often than foxes. Unfortunately, overconfidence is an all-too-human trait.
  • What differentiates foxes from hedgehogs is that they rarely see things as bad as they appear at the trough or as good as they look at the peak.
  • Optimists tend to be more accurate than pessimists. Keep this in mind the next time you read a doomsday forecast.
  • What experts think matters far less than how they think. We are better off turning to the foxes, who know many little things and accept ambiguity and contradiction as inevitable features of life, rather than turning to hedgehogs, who reach for formulaic solutions to ill-defined problems.
  • It makes virtually no difference whether forecasters are Ph.D.s, economists, political scientists, journalists or historians, whether they had policy experience or access to classified information, or whether they had logged many or few years of experience in their chosen line of work. The only predictor of accuracy was fame, which was negatively correlated with accuracy. In other words, the most famous forecasters—those more likely feted by the media—made the worst predictions.
  • Beyond a stark minimum, subject matter expertise translates less into forecasting accuracy than it does into overconfidence and the ability to spin elaborate tapestries of reasons for expecting “favorite” outcomes.
  • Like ordinary mortals, experts fall prey to the hindsight effect. They claim they know more about what was going to happen than they actually knew before the fact. This systematic misremembering of past positions may look strategic, but the evidence indicates people sometimes truly convince themselves that they “knew it all along.” Hindsight bias causes overconfidence.
  • The “marketplace of ideas” can fail because consumers may be less interested in the dispassionate pursuit of truth than in buttressing their prejudices.



Three Types Of Forecasters

Tetlock’s research explains why one of my favorite sayings is that there are three types of investment forecasters: those who don’t know where the market is going; those who know they don’t know where the market is going; and those who know they don’t know but get paid a lot of money to pretend they do. In other words, forecasters are playing an entirely different game.


As Tetlock noted, they’re “fighting to preserve their reputation in a cutthroat adversarial culture. They woo dumb-ass reporters who want glib sound bits. In their world, only the overconfident survive and only the truly arrogant thrive.” Tetlock also noted the same self-assured hedgehog style of reasoning that suppresses forecasting accuracy and the slow updating of beliefs can translate into attention-grabbing, bold predictions that are rarely checked for accuracy.


The lesson Tetlock’s research provides is that, as much as we would like to believe there are those that can predict the future, prognosticating is the occupation of charlatans.


A Call To Action

As I said in the Journal of Indexes in 2012, this is a call for action. If you have been using active strategies and have failed to outperform appropriate risk-adjusted benchmarks, or the fund managers you have hired have failed to do so, or if your advisor using active strategies has failed to do so, ask yourself:


  • What will I be doing differently in the future to ensure a different outcome? If I can’t identify anything to change, why do I think the outcome will be different?
  • Why do I think I will succeed where others (institutional investors) with far greater resources and other advantages (such as lower costs and/or no taxes to pay) have failed with such great persistence? What advantages do I have that will allow me to succeed?


Finally, it’s my experience that the vast majority of investors don’t even know what their returns have been relative to appropriate benchmarks. One reason for that is because Wall Street doesn’t want you to know. If you did, you might stop making them rich. Another might be that the truth would be too painful, so investors don’t really want to know. But you should. Without such information, there is no way to determine if your strategy is working.


If you don’t know, my suggestion is to take your portfolio to a fiduciary advisor, one that uses passive strategies, and ask them to analyze your holdings and show you how it has performed relative to appropriate benchmarks.


A fitting end is the following paraphrasing of a quotation from Chinese philosopher Lao Tzu more than 2,500 years ago: A great investor is like a great man. When he makes a mistake, he realizes it. Having realized it, he admits it. Having admitted it, he corrects it. He considers those who point out his faults as his most benevolent teachers. 


Larry Swedroe is the director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.



Larry Swedroe is a principal and the director of research for Buckingham Strategic Wealth, an independent member of the BAM Alliance. Previously, he was vice chairman of Prudential Home Mortgage.