Knowing the science of economics and finance, while incredibly helpful and important, is not sufficient to avoid making bad investment choices. Behavioral economists have been studying various biases that cause us to act against our own best interests. Even the smartest among us need help in overcoming these biases.
Cass Sunstein, a professor at Harvard, is not only a very smart man but also a generous one. In a recent column he kindly shared “a really dumb investment decision” he made. As Sunstein put it, “in a single day, [he] hit the trifecta, committing at least three classic behavioral mistakes.
If Professor Sunstein is prone to foolish investment mistakes, it seems fair to say we all are. What can you do to minimize the financial danger this predilection poses? How can you avoid costly blunders? The traditional answer, at least in contemporary America, is to seek help from a skilled financial advisor. These are supposed to be dispassionate practitioners who can contribute a steady hand and guide you toward rational behavior. You are paying them to be a voice of reason. Thus, you should be able to rely on them to dissuade you from behaving rashly, making foolish trades, or acting on your biases.
The trouble with depending on financial advisors, though, is the very set of problems that bedevils their entire industry. The financial services industry is plagued by conflicts-of-interests, asymmetric information, untrustworthy incentives, and a lack of professionalism. This daunting array of woes make it seem unwise to go anywhere near the typical financial advisor. And, indeed, there are a whole lot of practitioners out there who will leave you far worse off than they found you. You are wise to be wary.
On the other hand, if you can find advice that incentivizes trustworthiness, is free of conflicts-of-interest, and applies all knowledge solely to the advancement of your interests, it would be guidance well worth taking. Such counsel can only come from what I have referred to as a “true professional” It is not easy to find. Indeed, it may require hard work and serious study to overcome the needle-in-a-haystack quality of the current marketplace. Such effort is worth undertaking, though, in light of the enormous amount at stake over your lifetime.
In an arena where even our most brilliant and talented people need some help, you probably do too. The critical thing is to do the hard work of making sure you get the kind of skillful, care taking, and truly professional assistance that is worth having.