Chapter 5A Framework for Investment Decisions

“We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events.”

—Dan Kahneman, Thinking, Fast and Slow

We hope that Part One left you with a central message: We can beat the experts. Experts are biased and overconfident. Many years of experience are not something to be worshipped but something to be questioned. A long history of success does not guarantee future success; instead, it is a red flag for bias and overconfidence. We don't need an expert to make good decisions; we need a psychology coach. We know overconfidence is an overwhelming influence in decision-making, and this effect is often magnified for experts—unless it is rigorously contained. Many successful experts aren't even aware they are overconfident, which means they almost certainly have not put systematic processes in place to counteract overconfidence. We can do better and beat the experts. In order to beat the experts what we need is an evidence-based systematic decision-making process.

Yet the experts themselves can create additional barriers to adopting such processes. After all, the experts don't want you to follow an evidence-based systematic process—it would cut them out of the picture and eliminate their rationale for charging you a fee. We need to rigorously defend against their influential tactics. Financial service professionals utilize the following techniques to influence us into hiring them to ...

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