Being Humble is Better than Being Right

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I meet few humble advisors. Most are supremely confident in their knowledge of all things financial.

This confidence is rarely justified.

There’s a lot no one can possibly know, especially about the future direction of the market or even how to best structure a portfolio. I was struck by this observation by Kenneth French, one of the researchers (along with Eugene Fama) who identified the value premium in 1992. French did research to determine whether he could, “confidently conclude that the expected value premium in the U.S. declines or even disappears.”

His conclusion: “The short answer is you pretty much can’t say anything.”

While advisors like to extol the benefit of financial planning, their effort to bring certainty to the process is hampered by their inability to determine the date of death of their clients or their marginal tax rate at retirement.

While projections are helpful, certainty is elusive.

An excess of confidence is both unwarranted and harmful.

Pervasive biases

A recent study examined why we’re so motivated to stick to our beliefs, regardless of the evidence and show little interest in understanding those who hold contrary views.

The authors noted the pervasive biases that cause us to behave in this manner and to adhere to our views with “tremendous confidence,” even when it is unwarranted. Our stubborn adherence has, “...stifled sincere, fact-based, and open discussion over the merits and problems accompanying the endorsement of certain positions.”