How to Be a Skeptic—the Right Way: Part I

I have a friend who was born and raised in Missouri, “the Show-Me State.” One day he explained to me that Missouri’s nickname is said to have originated in a statement made by Willard Duncan Vandiver of Boone County, Missouri, who served in the U.S. House of Representatives from 1897 to 1903. Vandiver said, “I come from a state that raises corn, and cotton, and cockleburs, and Democrats, and frothy eloquence neither convinces nor satisfies me. I’m from Missouri, and you’ve got to show me.”

Since then, people from the “Show-Me State” have prided themselves in their habit of level-headed skepticism. While there are certainly times when it is appropriate and even advisable to be open-minded and accepting, a certain amount of skepticism is also necessary to help us avoid many traps that life and circumstances set for the unwary. This is nowhere more true than in the financial markets and investing.

We’d like to offer a series of articles here that discuss ways in which skepticism can actually be beneficial to you as an investor. With this first in the series, we’ll mention some principles and topics that will be important for the rest of the discussion.

First, it’s important to remember that whether you’re considering an investment opportunity or simply browsing various media for insights and entertainment, it has become increasingly obvious: You cannot believe everything you see, hear, or read. Much of it is “overdramatic.” Too much of the rest is just plain wrong.

Thus it falls on each of us to be positively skeptical in our search for knowledge. When we say “positively skeptical,” we mean that, while each of us must continue to think and learn and grow, we also must aggressively avoid falling for hoaxes and hype. In other words, to be positively skeptical is the opposite of being closed-minded; instead, it indicates an attitude of openness and careful attention, with an underlying orientation toward seeking reliable confirmation of any new information presented.

This can be a challenge, of course. In fact, nowhere is this more evident than when we consider the pervasiveness of social media on the internet. The very features that make online engagement so popular also make it a powerful forum for sowing deceit and confusion.

First, it’s now all too easy to share a claim far and wide, long before it’s been through any sort of reality-check. One or two clicks, and it’s on its way.

Second, evidence suggests false online news spreads faster than the truth. In a March 2018 Science report, “The Spread of True and False News Online,” a team of MIT researchers analyzed approximately 4.5 million tweets from some 3 million people from 2006-2017. They found that “Falsehood diffused significantly farther, faster, deeper, and more broadly than the truth in all categories of information.”

The authors also found that “human behavior contributes more to the differential spread of falsity and truth than automated robots do.” In other words, we can’t just blame it all on “the bots.” We owe it to ourselves to be vigilant.

The challenge is, few of us actually enjoy engaging in detailed fact-checking. That’s not entirely our fault. It’s likely due to a multitude of mental shortcuts, or heuristics, which we have honed over the millennia to make it through our busy days.

In their landmark 1974 paper, “Judgment under Uncertainty: Heuristics and Biases,” Nobel laureate Daniel Kahneman and the late Amos Tversky are widely credited for having launched the analysis of human heuristics, including when our mental habits are most likely to lead us astray.

Essentially, we’re more likely to share and comment on a social media post than to take the time to substantiate its accuracy. When considering an enticing investment opportunity, we often find it easier to skim the marketing materials than to dig for deeper understanding. Academic research that refutes current assumptions can be dense and difficult to decipher; if a particular assumption is already widespread, we’re prone to simply accept it as fact. Unfortunately, there are legions of cunning con artists and slick sales staff who know all this and have weaponized our behavioral biases against us.

This means it’s as important as ever to sharpen your skeptical lines of defense. Granted, it takes more time to carefully separate fact from fiction. But the upfront due diligence should ultimately save you far more time, money, and personal aggravation than it will ever cost you.

As professional, fiduciary financial advisors, we take very seriously our responsibility to provide scientifically verifiable, evidence-based research to support any recommendation we make. If we can help you in your quest to separate fancy from fact in your finances, please contact us.

Buen Camino!