The Fallibility of Experts
Experts are the go-to source for life’s uncertainties. We rely on them for guidance and advice during ambiguous environments. We crave their authority, confidence, and conviction. But the evidence is clear – experts are awful at predicting the future. Expertise is not synonymous with superior forecasting ability.2
Experts are extremely useful, if properly directed. As we’ll see, we can use an expert’s deep knowledge to improve our decisions. However, the process is not intuitive and doesn’t happen automatically. The burden is on us to ask the right questions.
It’s especially relevant for investing. Investors rely on consultants, economists, and managers to predict the future and position portfolios accordingly. But because we ask the wrong questions, we engage experts at what they are bad at – prediction. We fall into the same trap, desperately trying to predict the future.
As stated in the beginning, experts are bad at prediction but great at assessing base rates. That’s the secret to using experts. By focusing on base rates, rather than predictions, we’ll effectively use experts to make better investment decisions. Chip and Dan Heath, authors of Decisive: How to Make Better Choices in Life and Work, highlight the strengths and limitations of experts:
We use experts the wrong way. We lean on them to tell us about the future. Experts aren’t any good about predicting the future. What they are good at is explaining how similar situations have worked out in the past.3
It’s dependent on us to harness the power of experts. Here’s how to do it.
PREDICTION ISN’T THE GOAL
The evidence is clear – experts can’t forecast the future. As Nate Silver, author of The Signal and the Noise: Why So Many Predictions Fail – but Some Don't, states:
We need to stop and admit it: We have a prediction problem. We love to predict things – and we aren’t very good at it.4
Experts are bad across all fields, not just investing. Philip Tetlock, author of Superforecasting: The Art and Science of Prediction, highlights the fallibility of experts:
…The experts in his [Tetlock’s] survey – regardless of their occupation, experience, or subfield – had done barely any better than random chance, and they had done worse than even rudimentary statistical methods at predicting future political events. They were grossly overconfident and terrible at calculating probabilities…It didn’t matter whether the experts were making predictions about economics, domestic politics, or international affairs; their judgment was equally bad across the board.5
While experts have a poor track record for prediction, they still have information that can help us, but only if we correctly frame our questions.
Adam Schwab is a member of the Insurance Investment, to access the full content and learn about the right, the wrong and the recommendations on how to use experts click here. The Insurance Investment group is a space for peers to focus on industry related discussions; clicking here to see insurance specific content.