The problem is, no one really can. So a provocative new research paper by two academic economists asks the logical follow-up question: “Why do humans pay for advice about the future when most future events are predominantly random?”
That question is more than academic, however. Besides the cost of buying advice, there’s the issue of whether it is actually worthwhile. Or, worse still, if following a confident-sounding “expert” could make otherwise long-term, fundamental investors vulnerable to the siren song of speculation.
Learning how to safely interpret investment advice is particularly relevant at year-end, when economic and financial market prognostications proliferate.
In “Why Do People Pay for Useless Advice? Implications of Gambler’s and Hot-Hand Fallacies in False-Expert Setting,” Nattavudh Powdthavee of the London School of Economics and Yohanes E. Riyanto of Nanyang Technological University in Singapore set out to determine whether people can be “induced to believe in a non-existent expert, and subsequently pay for what can only be described as transparently useless advice about future chance events.” The answer is yes, which confirmed previous research.
In the experiment, dozens of undergraduate students from various academic disciplines in Thailand and Singapore were asked to bet on the outcome of five rounds of coin tosses. Obviously, the results of tossing coins are random and no one can be an “expert” on the matter. Yet participants exposed to correct “predictions” actually began to put credence in the forecasts, and some ended up paying for the advice. Though the methodology of the study is complicated, the study shows that people who are proved right about anything — even about events that can’t possibly be predicted — acquire credibility.
The authors stress that their research does not disprove the existence of experts. Clearly, there are people who know more about a given subject than do others, and their advice may be worth the price. But the research does show that people are willing to attribute expertise without sufficient evidence.