The Expertise Illusion

The expertise illusion - image for article by Greg Alder

It’s an unusually mild December day in New York. In the downtown office of Fortune Wealth, the air crackles with anticipation. It’s the day of the company’s party. It’s the day the bonuses are handed out. It’s also the day the Adviser of the Year is announced.

The bonuses and the Adviser of the Year are both determined by investment performance. The better your results for clients, the higher your bonus. The adviser with the best 12-month performance is awarded Adviser of the Year.

The winner this year is Jake, a newbie. In his acceptance speech, Jake thanks veteran Ted. “When I joined November last year, Ted said ‘Kid, my tip: trade enough to keep the commissions rolling in, but not so much you look like an amateur stock picker’.” Ted had been Adviser of the Year four years earlier.

Ted, like most of the other advisers in the room, knows something that Jake will learn. The truth is that investing performance has a way of averaging out over time. The best adviser this year is unlikely to be the best next year. The worst this year could easily have a great result next year.

When economics Nobel laureate Daniel Kahneman evaluated performance of 25 advisers over 8 years, the average for each adviser varied just .01 from the mean.

To suggest that the advisers’ result were no better than chance would have undermined their belief in their own gifts – and in turn undermined clients’ belief in the value of Fortune Wealth’s advice.

In his words, “the advisers themselves felt they were competent professionals doing a serious job, and their superiors agreed”.

When Philip Tetlock, a University of Pennsylvania psychologist, studied 284 political advisers over 20 years, he gathered over 80,000 predictions about economic and political trends.

The result? These experts did worse than they would if they’d assigned equal probability to each possible outcome. The more famous the political forecaster, the more frequent their errors.

The advisers who hadn’t performed so well in the past 12 months had no less faith in their skill. They could put down the year’s lacklustre performance to a host of factors outside their control.

Similarly, the political forecasters put their errors down to unforeseeable events – black swans, in Nassim Taleb’s words.

Something interesting came out of these studies. People with a degree of knowledge in a given field usually do better than average. But people widely recognised for their expertise usually do worse.

So what’s happening here?

First, we believe the infallibility of expertise. We believe that experience has imbued us with the skill to know what will and won’t work, to explain the past and confidently predict the future. That’s why the political forecasters, when proved wrong, deflected responsibility from themselves to unforeseeable external forces.

Second, we fall under the spell of expertise. If we are in the presence of someone with a reputation for expertise, we’re unlikely to challenge their diagnoses or their predictions. In any field, the recognised experts tend to rise to the top. They are in positions of power and they might use that power to influence others to their way of thinking.

Some of us struggle to accept that we’re wrong. We resigned a client recently who is good at his health craft but has a worrying inability to acknowledge when he is wrong. It’s a characteristic we have observed over the years, as have others. I wanted to tell him he’s wrong not to allow himself to be wrong. I thought better of it.

To paraphrase Niels Bohr, “an expert is a man who has made all the mistakes which can be made in a very narrow field”.

Expertise is a blindingly bright light. It dazzles us, and makes us make mistakes.

Expertise prevents us from challenging accepted wisdom, from asking naïve questions. There’s a reason that troubleshooting sections in owners manuals start with Make sure the device is plugged in and turned on.

It takes skill to recognise the illusion of skill. It takes a skilled expert to know the value of asking “what if she’s right and I’m wrong?”.

Experts are just humans in the end. They are dazzled by their own brilliance and hate to be wrong.

Daniel Kahneman, Thinking Fast And Slow.

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