Coronavirus: beat the behavioural gremlins #2


(Friday, Mar, 27, 2020)
|   5 mins

Managing the Truman problem

Confidence defined

When we look at the definition of confidence above, we can intuitively see why it’s important when making a decision.

If we have too little confidence, there are a predictable range of outcomes:

  • we kick things into the long grass,
  • we look for more information, even when it’s unlikely to help us,
  • we stick with the status quo (we’ll return to the status quo bias later in the series),
  • we select sub-optimal choices, where at least we feel like we’re doing something.

There is also a significant body of evidence that suggests a range of equally bad outcomes when we are overconfident in our capabilities. Who better to illustrate this than Trump Snr. and Jnr.

S&P Futures - Trump's Tweets

So what’s the ‘golden rule’ of confidence and decision-making?

We stand the best chance of making good choices when our confidence levels are accurately calibrated with our knowledge/ability.

Confidence and decisions - The golden rule

In the context of investment decision-making, whether you’re an individual, an investment committee, or a board of trustees, you will generally get advice. And when that’s the case, your adviser’s level of confidence becomes really important.

Adviser confidence: The Truman Problem

Harry Truman is generally thought of as one of the better US presidents. However, in the context of decision-making, he is also known for his repeated calls to, ‘Find me a one armed economist!’

Confidence Killer #1

The legend goes that Truman couldn’t bear it when an economic adviser didn’t give a confident steer, but suggested, ‘On the one hand you could do this, on the other hand you could do that.’ Whilst it’s possible that Truman’s advisers could have been poor thinkers or communicators (or both!), it’s just as likely that they were well-calibrated and wouldn’t give false levels of confidence in unpredictable situations.

Truman wasn’t unusual – humans are hardwired to dislike uncertainty. And in some fields, the hunt for an unambiguous answer is fine.

Confidence building - Houses vs portfolios

If we’re building a house and we ask our structural engineer, ‘Will this beam be sufficient to maintain structural integrity?’, they should be able to answer your question accurately with a high-degree of confidence. This is because building a house is a well-trodden path. Its processes and components are constant and well understood, e.g. the tensile strength of a steel beam.

Financial markets are, in contrast, dynamic, constantly evolving and ultimately driven by greed and fear. Ask a well-calibrated investment adviser, ‘Will my portfolio meet its objectives in 5 years time?’, they (in most cases) will not be able to answer with the same degree of confidence.

Whilst that may seem obvious, the interesting question is how people interpret different confidence levels from advisers. There’s a stream of research that has examined this and there is evidence that suggests that when we are outside of our field of expertise, we use the ‘Confidence Heuristic’. Heuristics are the non-structured ‘rules of thumb’ that we use to quickly judge situations. I could give you a more technical answer, but Dilbert sums it up better than most scientists.

The Confidence Heuristic

In essence, the Confidence Heuristic suggests a couple of important things:

  • In areas where they are not expert, people use expressed levels of confidence as a proxy for expertise.
  • If low levels of confidence are expressed, this can be interpreted as a lack of expertise/knowledge.
  • We appear to have a preference for overconfident advisers.

This is something that is well understood by politicians. When they are questioned in areas where there is no possibility or need for them to have an accurate answer, they all seem to struggle to say the three hardest words…

The Three Hardest Words

The challenge

If you’re receiving investment advice, you want it to be:

  • well-calibrated – this gives the best chance of a good outcome,
  • confidently articulated – this gives the best chance that you will take the advice.

Given the nature of investment markets, however, there are many things that we can’t be certain about, particularly at the moment. When taking advice there is a risk that we may translate good calibration, i.e. wholly justified uncertainty, for a lack of expertise and lose confidence. This lack of confidence can lead to a lack of action, or potentially seeking advice from someone, who will express a more confident, but perhaps less well-calibrated view.

Some thoughts for those receiving advice:

Know yourself. All humans are hardwired to dislike ambiguity – some of us more than others. It’s fine to look for certainty where it’s possible to get it, but the nature of markets can often make certainty hard to come by.

Name it to tame it. In the current market chaos, you or your board colleagues are going to have fears and concerns. The more clearly that you can get these concerns on the table, the more effectively your adviser can help you address them.

What kind of advice works for you. I believe the most important thing that you can do to beat the Truman problem is to be clear with your adviser about what kind of advice works for you, both in tone and content. If you want a clear steer, ensure that you get it.

Some thoughts for advisers:

When we’re giving advice, the points above are clearly relevant. One thing that’s particularly important in the current market environment is that we get off the fence when clients need us to. One school of advisory thought suggests that our role is to simply present options, their pros and cons and let the clients decide. For some clients and situations that will work well, even in the current carnage. However, given the complexity and challenging nature of what’s happening right now, others will want or need a clearer steer. I believe that a good adviser can be both well-calibrated and confident in tone, even when the situation is challenging. For me, that’s using words such as, ‘This is a finely balanced situation with both pros and cons, but if I were in your situation, I would be doing the following…’. You may have your own solution – if you have, share it in the comments section.

As always, both the science and practice of real-life decision-making is more complex than a blog post allows. If you’re a pension fund trustee or other institutional investor and would like more information, please contact


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