Are Your Investment Decisions Influenced by “Authority Bias”?
Avoid people who are “often wrong, never in doubt.”
In this article, we’ll cover authority bias, which plays on our natural desire to have authority figures tell us the right way.
Author’s Note: This article is part of my series on investing psychology:
12 Common Mistakes That Can Destroy Your Investing Profits
Learn how successful investors avoid cognitive traps and build a winning mindset.
Authority Bias — What is it?
Authority bias is the tendency of investors to give more weight and influence to the opinions of people in authority, believing them more likely to be correct.
How does authority bias apply to investing?
Many psychological research studies show that we are more influenced by people we consider to have high authority.
In investing, people are more likely to believe the opinions of Wall Street analysts, bankers, and TV personalities because they appear to be in positions of high authority on investing.
This bias is actually based on good logic: You’d expect a financial authority on TV to know a lot about the stock market!
And sometimes they do, meaning the extra weight we give them is warranted.
But there are many people who build an appearance of high authority, but really don’t know what they’re talking about.
In addition, many of the talking heads on CNBC are NOT actually trying to accurately predict what’s coming or correctly assess the prospects of a stock.
Not at all.
They’re trying to project confidence and build your interest so you’ll keep watching their show and boost their viewership numbers.
I have a phrase to describe that type of personality: “Often wrong, never in doubt.”
It’s not to say that all financial authorities are full of it.
But all financial advice, even that from authorities, should undergo your careful scrutiny.
What should you do instead?
When considering financial advice, opinions, projections, recommendations, and information from authorities, ask yourself these two sets of questions to determine its value:
“How credible is this person? What type of experience do they have that is likely to make them right about their opinion?”
And second (this one is very important):
“What is their purpose and incentive in sharing their opinion? Are they trying as best they can to be correct? Or, are they trying to keep my attention, win my trust (and money), or grow their influence?”
Whatever the situation, don’t automatically trust authorities. Use your best judgement to understand their intentions and experience, and weigh their opinion accordingly.
Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. All information is obtained from sources believed to be reliable but cannot be guaranteed for accuracy or completeness. Use this information at your own risk.