Does it make sense to heed the advice of experts? This doesn’t seem like a hard question. Intuitively, it seems, the answer should be yes. I certainly listen to my doctor and to many others with specialized expertise. And as a society, we all rely on experts—from civil engineers to airline pilots to firefighters—for our health and safety. At the same time, though, human judgment seems to be riddled with flaws. Over the years, in fact, I’ve noted these examples:
- After reading his senior thesis, Michael Lewis’s advisor at Princeton University gave him this advice: Whatever you do, he said, don’t try to make a living as a writer.
- After one performance at the Grand Ole Opry, the concert manager told Elvis he should go back to his prior career, as a truck driver.
- Steven Spielberg applied to USC’s School of Theater, Film and Television three times and was rejected all three times.
- J.K. Rowling’s first Harry Potter manuscript was rejected by a dozen publishers before one finally took a chance on it.
- When he graduated from college, Malcolm Gladwell wanted to be an advertising copywriter but was turned down by 28 of the 28 agencies he applied to.
- Before President Clinton selected her to serve as Secretary of State, a White House official dismissed Madeleine Albright as “second tier.”
- Early in his career, Walt Disney was fired from the Kansas City Star. His editor said Disney “had no good ideas” and “lacked imagination.”
- Before winning an Emmy, a Grammy, an Oscar and a Tony, a teenage John Legend was denied a spot on the amateur talent show Star Search.
- When Tom Brady entered the NFL draft, 198 players were chosen ahead of him.
- When a young William Sharpe submitted a paper on the Capital Asset Pricing Model to the Journal of Finance, it was rejected. Years later, the Nobel committee cited that paper when it awarded Sharpe the prize in economics.
- Bessemer Venture Partners maintains a list on their website of the investments they evaluated but decided against. These include Apple, Google, Facebook and Tesla.
- And my personal favorite: Harvard Business School didn’t accept Warren Buffett.
In other words, human judgment is far from perfect. Even experts seem to get things wrong. But when it comes to your investments, does that mean you should never rely on expert opinion? How should you think about this question?
The first step, in my opinion, is to distinguish between decisions that require a judgment about your own personal situation and those that require judgments about the wider world. Judgments about the wider world—including predictions about the economy, about the market or about a specific stock—are much more difficult. That’s because of the virtually infinite number of variables out in the world.
Suppose, for example, you had been looking at the stocks of hotels or cruise lines two years ago, before the pandemic. No matter how thorough the analysis, there’s no way anyone could have known that these industries would soon have the rug pulled out from under them. It would have been similarly difficult for investors to foresee past crises, such as 9/11. And yet, the impact on markets was significant. As a result, experts can’t really be helpful in making economic predictions because no one knows what unexpected events lie ahead.
You may be familiar with the investment classic A Random Walk Down Wall Street, which includes this famous line: “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts.” While this sounds like hyperbole, a team at The Wall Street Journal has tested and confirmed it. In an annual competition, they pit the hedge fund industry’s best ideas against selections made by throwing darts at the stock pages. Each time, the randomly-thrown darts have beaten the hedge fund managers. The lesson: Stock-picking and macroeconomic forecasting may seem like areas where you would want to listen to experts, but the data regularly confirms that they are not.
You have a lot more information, though, about your own personal finances than you do about the wider world. To be sure, there will always be unknowns. But your own financial future isn’t a complete unknown. Suppose, for example, you were considering a new home mortgage and trying to decide between a fixed and a variable rate. A fixed rate offers certainty. Meanwhile, a variable rate is a potentially double edged sword: It offers a lower rate for a handful of years, but then the rate can rise. For that reason, most people choose the fixed rate option. But I recall a friend who once opted for a variable rate. He was happy to take the risk and, in fact, didn’t even see it as a risk. He was newly married and confident he would move and pay off the loan long before the rate reset. Was he making a prediction? Yes, but it was a reasoned judgment about his own personal finances, not a wild guess about the wider world.
This illustrates my first recommendation: If an expert is offering advice, think critically about the information supporting that advice. How knowable is it? While all decisions require some judgment about the future, try to determine whether the expert is relying mostly on facts or on his crystal ball.
What else can you do to protect yourself from erroneous expert judgment? The concept of intrinsic value provides another useful filter. No one can predict where the stock market is going next. But because stocks have intrinsic value, it doesn’t require an act of faith to invest in the market—assuming you have a long term perspective. Bonds and real estate also have intrinsic value. These are reasonable statements for an expert to make.
In contrast, if something lacks intrinsic value—such as gold, cryptocurrency or tulip bulbs—then experts are simply in no position to talk about it. Without intrinsic value, investments like this are based only on what the next person is willing to pay for them. As a result, expert opinion in this realm isn’t worth much. Steering clear of it is thus another way to protect your pocketbook.
Another distinction to keep in mind: Some questions have a yes-or-no answer. For example, will the Fed raise interest rates this year? Or will Congress raise taxes? With these questions, there are just two possible answers. In contrast, some questions are totally open ended. For example, how will the rivalry between the U.S. and Russia evolve, and how will it impact our respective markets over the next ten years? A broad question like that is much harder to get right than a narrower yes-or-no question. As a result, that is another litmus test for experts. The broader the question, the less you should put stock in the answer offered by any expert.
Statisticians have understood this for a long time. In 1950, Glenn Brier, a statistician with the U.S. Weather Bureau, developed a tool for assessing the accuracy of weather forecasts. His methodology is now known as Brier scoring and is used to assess all manner of forecasts. I won’t get into the details, but the key takeaway is that it’s only possible to assess the quality of a forecast when the question has a limited set of possible answers. If an expert is opining on something broader—like the evolution of our relationship with Russia—you can certainly listen, but recognize that they are so far out on a limb that it’s difficult to even measure how far out they are.
A final note: Of course, many personal finance decisions don’t require forecasts at all. Those, in my opinion, are the safest situations in which to listen to experts. Many tax strategies fit in this category, which is why CPAs are among my favorite experts to listen to.