We all think we know more than we actually do. Most of us just won’t admit it. Nobel Laureate Daniel Kahneman describes overconfidence as a curse and recommends advice from an external point of view as a cure. The problem is, we don’t even recognize we suffer from overconfidence in the first place.
The foundation of overconfidence can be traced directly to confusing luck with skill. When we make decisions that lead to good outcomes, we happily credit our skill even if it was mostly luck. When we try to repeat this process and a poor outcome results, we are puzzled.
If we are willing to look at our decisions more broadly, we can gather invaluable information from choices that didn’t work out as planned. Often, our beliefs about something (like the stock market or real estate) prevent us from admitting we might be wrong. The more we cling to these false beliefs, the less that we are able to think about choices independently. We want to think like everyone else.
Here’s a prescient example: Gallup has polled the view of Americans’ on the best long-term investment for many years. As the chart below depicts, since 2013, the Gallup survey respondents have consistently selected real estate as the best investment by a huge margin, 35% (real estate) to 21% (stocks) in the most recent study. The actual long-term data doesn’t support these beliefs but we continue to retain them anyway.
Author Annie Duke (Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts) talks about “strengthening the muscles of admitting failure “in order to make better decisions. We know some things but we don’t know even more.
To put an even finer point on this let’s consider the current government induced economic crisis that we are living through. Over the past three months, I have talked with clients that “know” inflation will come roaring back; others that “know” stock prices will collapse; and some that “know” real estate will falter. In fact, we don’t (and can’t) “know” any of these things.
We would be wise to consider the advice of Daniel Kahneman and seek a dispassionate and independent perspective. That’s where we come in. Guiding clients to make smarter decisions within a framework of uncertainty is both challenging and rewarding. We’re here if you want to talk. Ready for a real conversation?