{"id":155,"date":"2015-03-02T16:44:05","date_gmt":"2015-03-03T00:44:05","guid":{"rendered":"https:\/\/chaltenadvisors.com\/blog\/?p=155"},"modified":"2015-03-02T16:45:47","modified_gmt":"2015-03-03T00:45:47","slug":"why-do-many-reasonable-people-doubt-the-science-of-investing","status":"publish","type":"post","link":"https:\/\/chaltenadvisors.ca\/blog\/why-do-many-reasonable-people-doubt-the-science-of-investing\/","title":{"rendered":"Why Do Many Reasonable People Doubt The Science of Investing?"},"content":{"rendered":"

The lead article in the current issue of National Geographic,\u00a0“Why Do Many Reasonable People Doubt Science?”<\/a> is worth a read for those bewildered why more people haven’t embraced the\u00a0science of investing. \u00a0Many investors still seem\u00a0willing to pay high fees for professionals to try to beat the stock market when the evidence<\/a>\u00a0demonstrates that\u00a0investment returns are driven\u00a0by\u00a0risk and that the best strategy for individual investors is to buy and hold the market by building a sensible and diversified portfolio suitable to their risk tolerance using\u00a0low cost investment\u00a0funds.<\/p>\n

Researchers point out that while most people are more than happy to accept the findings of science, we still tend to hold on to more basic\u00a0intuitions, or what the researchers call our naive beliefs. \u00a0No matter how strong the scientific evidence we tend to continue to use\u00a0these naive beliefs as the principle mechanism for helping us to make sense of the world around us. \u00a0Interestingly\u00a0what we choose to believe is more often driven by how<\/em> we choose to believe rather than the belief itself. \u00a0While science itself appeals to the rational side of the brain, beliefs are driven more by the emotional side and most often driven by our need as humans to fit in with those around us. \u00a0As the author puts it, “For some people, the tribe is more important than the truth.” \u00a0Furthermore, the research suggests that even when science literacy is increased, rather than rationalizing entrenched beliefs it actually just polarizes them further as people tend to use scientific knowledge to reinforce their beliefs, rather than to challenge them.<\/p>\n

The science of investing is very compelling and the evidence is clear, but is up against some fairly powerful\u00a0beliefs, emotions and behaviours that get in the way. \u00a0We’ve identified a number of reasons why beliefs might be getting in the way of good science when it comes to investing:<\/p>\n

1) Money\u00a0is very\u00a0emotive. \u00a0 Whether you like it or not, money is an important part of life, but can also be a source of strained emotions or stress. \u00a0Do\u00a0I earn enough money to support my\u00a0living expenses? \u00a0Will I\u00a0have enough money to retire or to pay for my children’s university? \u00a0How come those people have so much more money than we do? \u00a0How can I get rich by investing?\u00a0\u00a0These are real questions than can inspire strong feelings of fear, of greed, even just a strong desire to do the best you possibly can.\u00a0 The investment and\u00a0infotainment\u00a0industries\u00a0know that money is emotive for people and market to\u00a0them accordingly.<\/p>\n

2) We buy lottery tickets and go to Las Vegas. \u00a0The appeal of winning it big can be\u00a0very seductive and the investment industry again is very adept at marketing to your emotional brain. \u00a0For some people, the excitement surrounding a long shot win is an emotion that needs to be satiated. Gambling in a casino, buying a lotterty ticket or speculating with\u00a0your money by giving it to someone who promises superlative investment returns shouldn’t be confused with a sound investment approach.<\/p>\n

3) Proactivity vs passivity. \u00a0Society doesn’t like the idea of passivity, certainly not as the best way to achieve a goal. \u00a0It just seems like you should be doing something more – however in the case of investing, the evidence <\/a>suggests that the best course of action is simply to be invested in the market in an intelligent way, not try to outsmart it.<\/p>\n

4) We like winners. \u00a0Everyone listens to the winners, and the winners get to write their story. \u00a0The challenge with investing is that in most cases it is virtually impossible to distinguish whether winners are there because of skill or luck and it’s nearly impossible to identify winners in advance. \u00a0Even in a coin toss someone is going to get 10 heads in a row if you have enough tossers. \u00a0In the case of investing, those rare\u00a0winners are praised for their wisdom, get interviewed on CNBC, write books on their winning strategies and, yes, attract more money from investors.<\/p>\n

5) We want the best for our kids – “Passive investing? \u00a0This is our children’s future we’re talking about. \u00a0I don’t want Walmart, I want the Ferrari\u00a0of investment funds.” \u00a0This is a direct quotation\u00a0from a particular discussion from our past investment careers that\u00a0we think speaks for itself. \u00a0The reality is that in the field of investments, the Ferrari just costs more, it doesn’t get you there any faster.<\/p>\n

6) We seek expert advice in other walks of life – if you have an injured knee, for example, you\u00a0seek out the best possible doctor with the most training, skill and experience. \u00a0Investing is an\u00a0area where applying additional resources, training or experience doesn’t necessarily positively impact the end result. \u00a0Those in the investment industry who say they have the skill, training and experience to beat the market are ignoring the evidence. \u00a0The evidence suggests that accessing the market through low cost investment vehicles like ETFs and low cost mutual funds is better than trying to beat the market.<\/p>\n

When it comes to investing, the science is compelling but the beliefs that influence behaviour are powerful. \u00a0Furthermore, the investment industry is\u00a0aware of these beliefs and very persuasive in its\u00a0attempts to have you focus on them rather than the science.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

The lead article in the current issue of National Geographic,\u00a0“Why Do Many Reasonable People Doubt Science?” is worth a read for those bewildered why more people haven’t embraced the\u00a0science of investing. \u00a0Many investors still seem\u00a0willing to pay high fees for professionals to try to beat the stock market when the evidence\u00a0demonstrates that\u00a0investment returns are driven\u00a0by\u00a0risk […]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,7,12],"tags":[],"class_list":["post-155","post","type-post","status-publish","format-standard","hentry","category-all-posts","category-graham-bodel-posts","category-passive-vs-active-investing"],"_links":{"self":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/155","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/comments?post=155"}],"version-history":[{"count":4,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/155\/revisions"}],"predecessor-version":[{"id":159,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/155\/revisions\/159"}],"wp:attachment":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/media?parent=155"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/categories?post=155"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/tags?post=155"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}