In his brilliant book about human psychology and money, The Soul of Wealth, author Daniel Crosby writes about the ways in which our over confidence can hurt us.
He quotes research that reports; 95% of people surveyed rated their own sense of humour as better than average. In another survey, 100% of men believed they had above average interpersonal skills and 94% believed they were athletically superior to the average man. US high school student rank themselves as the best in the world in maths but actually rank distinctly mid-table.
All of which reminds me of the recent YouGov poll where 1 in 8 men felt that they could take at least one point off Serena Williams at tennis. Yes, that is 23-time grand slam winner Serena Williams. When YouGov posted this stat on Twitter it led to the following unimprovable response from user @longwall26:
“Confident in my ability to properly tennis, I take the court. I smile at my opponent. Serena does not return the gesture. She’d be prettier if she did, I think. She serves. The ball passes cleanly through my skull, killing me instantly.”
We as humans are overconfident in our abilities, of that there is no doubt. The problem is that it is a bigger issue for us when it comes to our finances than in the unlikely event that we get to pay tennis against Serena.
We tend to believe that if we manage our own money, we can beat the markets. I have met many self-investors who are constantly reading the financial press to try to identify the next trend and change their investments. The problem with this is that the global stock market is the equivalent of facing Serena across a net, they are brutally strong, faster thinking, better coached and in possession of more information than you. You will get beaten up, maybe not immediately but very badly over time. The human brain tends to compensate for the negative experience of underperformance by remembering the investment wins and forgetting the losses.
I have yet to meet a self-investor who has kept a meticulous past performance record.
As humans we also tend to believe that our financial actions are entirely rational. That spending is only driven by what we need, our income will always increase above average and that we can afford to run that expensive house that looks a stretch to the mortgage broker.
One of the problems we have created in the last decade is that we have built an online environment where we can have our own beliefs reinforced. Firstly, it was by social media dividing us into tribes so that we only hear similar opinions in an echo chamber and now it is by AI that is trained to agree with us and stroke our egos.
The only solution to this is to accept the need for experts.
I can be an expert at one thing, and I spend most of my waking hours doing that one thing – finance. If I want to know about the state of the environment, I need the consensus opinion of all the world’s finest climate scientists, that is what they are expert in. The same applies to economics, politics, car servicing, IT and roofing.
Equally the world’s economists, scientists, politicians, car mechanics, IT professionals and roofers need me to help them with their finances.
The best test of an existing strongly held opinion is to test that opinion face to face with an expert. It is incredible how often when these beliefs are challenged, we can’t explain why we think them. Most people say that they understand the mechanics of a toilet flush, but when researchers asked them to explain the process to a plumber, most couldn’t.
Lastly, 9% of American Men think they could beat a crocodile in a fight. A fully grown male crocodile can reach 20 ft long and weigh up to 150 stone.
Whilst we can’t help you with crocodile wrestling or improve your serve, we are coaching hundreds of families about their financial planning from our offices in Hook, Hampshire and throughout the UK.