Value Investing: Tools and Techniques for Intelligent Investment

Chapter 3. Pseudoscience and Finance: The Tyranny of Numbers and the Fallacy of Safety^[3]

In the world of modern finance, a love of numbers has replaced a desire for critical thinking. As long as something has a number attached to it, it is taken as gospel truth. Research shows that people are often fooled by the use of pseudoscience. Simply making things sound complex makes people believe them more! Risk managers, analysts and consultants are all guilty of using pseudoscience to promote an illusion of safety. We all need to be on our guard against the artificial deployment of meaningless numbers. Critical thinking and scepticism are the most unrated (and scarce) tools in our world.

• A recent study by Weisberg et al. revealed just how easily most of us are fooled by anything that sounds vaguely scientific. They put neuroscience language into a standard psychological explanation for a variety of biases. Some of these explanations were 'good' (genuine) and some were 'bad' (circular restatements of the bias itself). Both good and bad explanations were rated as much better when they contained the meaningless neuroscience information.

• Garner et al. have shown that people are easily distracted by 'seductive details'. After reading just a few paragraphs loaded with 'interesting' but irrelevant information, people simply can't recall the important stuff! Suddenly the world of analysts is starting to make some sense to me!

• Finance is loaded with pseudoscience and seductive details. For instance, ...