The Power of Doubt

To make better decisions, embrace uncertainty

In the 1990s, I was running a trading team in New York. When staff and clients arrived at our annual Christmas party, we would ask them to name one stock that would beat the market in the next year.

This was important information. After all, we are talking about highly educated fund managers, savvy traders, the smartest people in the room.

We also had a dartboard. We would plaster it with the share price lists from the Wall Street Journal. Then we’d get everyone to throw a dart. We’d keep a record of that too.

I can’t remember a year when the dartboard wasn’t the overall winner.

Expert frailty is now widely acknowledged

Today we can be fairly certain that smart people are often wrong, especially when predicting.

This plays out in the investment world. Last year’s best performing investment fund is almost certain not to be the best in the coming year. It’s also a certainty that significantly more funds will underperform the market than outperform it.

Educated experts don’t generally predict well. In one MIT project, a group given only minimal market information invested far more successfully than those exposed to the full gamut of investment news and advice.

A 2005 Princeton study found the predictions of political pundits to be incorrect almost 70% of the time.

Is there a common thread amongst those getting it wrong?

Empirical evidence suggests predictive failure is more likely to occur amongst those who are “certain” they are right.

Research results show this to be the case regardless of the skill-set or the political persuasion of the expert. Fundamental investment analysts fail as often as technical analysts. Left leaning commentators and right wing forecasters are equally hopeless.

The only thing they seem to have in common is the certainty they have of their own view.

What can you do about this?

Be wary of those who sound certain

One of the most compelling analysts I know always touches my nervous buttons. He can articulate the downside of any situation with engaging grace and elegance. If I stuck to his advice, I would have missed every bull market in history.

Here’s three simple exercises to stress-test your strategy.

• Collaborate. Look for diverse input. Spend some time brainstorming why the great idea won’t work. You may uncover some issues, but also ways to solve them.
• Examine why the dartboard can win. This will introduce real lateral thinking into your decision-making. It may even give you a better idea.
• Check your intuition. Acknowledge your own experience. It sends emotional signals to you, both positive and negative. Don’t depend on them, but listen to them all the same. How does the idea feel? Why?

Strategic plans are great the day they are signed off. But from then on, their use-by date is ticking. Relying on a single strategy is problematic when the situation changes. To counter inert decision making, embrace uncertainty. Use the solvent of doubt to adjust your strategy to fit the situation.