Don't Let the Experts Shut Down Your Brain

You've likely heard of Nouriel "Dr. Doom" Roubini, Robert Shiller, and Meredith Whitney. But are you familiar with Noreena Hertz?

While Roubini, Shiller, and Whitney were pounding the table to try to wake people up in the U.S. prior to the financial crisis, Hertz was doing the same in the U.K. Her work focused on the unsustainability of the flavor of capitalism that was running the show prior to the crisis. And, as a 2009 Fast Company article highlighted, she seemed to have a pretty good idea of what was going to happen. In her 2004 book, The Debt Threat, she wrote:

Is there reason to believe that we are soon going to see more defaults on commercial debt, emblematic of a widespread financial crisis? I believe that within the next five years, yes, we will see this.

What does Hertz have to say now? As part of enjoying the market holiday on Monday, I tuned into a November 2010 talk that Hertz gave at a TED conference warning of yet another danger: Listening to experts.

Total eclipse of the brain
In her talk, Hertz referenced a brain study, and though she didn't name names, I'm assuming she was talking about the work of Jan Engelmann, Monica Capra, Charles Noussair, and Gregory Berns at Emory University.

The researchers hooked participants up to an fMRI scanner and watched their brains at work as they made a financial decision. But the catch was that some participants were given "expert" advice on the matter while others had to make up their minds on their own.

Not all that surprisingly, the participants given the expert advice were more likely to go the route that the expert suggested. Shockingly though, the researchers also found that:

Brain activations showing significant correlations with valuation ... were obtained in the absence of the expert's advice ... in intraparietal sulcus, posterior cingulate cortex, cuneus, precuneus, inferior frontal gyrus and middle temporal gyrus. Notably, no significant correlations with value were obtained in the presence of advice.

In plain English? When given expert advice, participants' brains shut down.

If we lived in a world where experts were always right, perhaps this wouldn't be something to lose sleep over. But experts aren't always right -- not by a longshot.

An expert solution
Hertz by no means suggested that we do away with experts (after all, she's an expert). Instead, she recommends three steps to alleviate the problems that come with expert advice.

Now I generally try to limit the amount of horn-tooting that I do, but I can't help but toot the horn for The Motley Fool here. Why? Because The Fool does a tremendous job practicing all three of the points that Hertz outlined -- and we've been doing this from Day One. So with that, let's take a look at Hertz's guide to protecting yourself from expert advice and how The Fool can help you do just that.

1) Challenge experts. When we treat experts like unassailable bastions of truth, wisdom, and general awesomeness, our brains will shut down faster than a nightclub when Kenny G comes on. However, The Fool has always been about challenging the so-called experts, whether they be analysts on Wall Street, pundits on TV, or academics in their ivory towers.

Sure, we still like to hear what the experts have to say and that's why we interview folks like David Einhorn and Costco (Nasdaq: COST  ) CEO Jim Sinegal. But that hardly stops us from calling out experts on a regular basis whether it's Rick Munarriz taking Jim Cramer to task over his call on SodaStream (Nasdaq: SODA  ) , Brian Richards cringing at terrible "Rich Dad" advice, or Morgan Housel proving that there are no sacred cows by calling out Warren Buffett and Berkshire Hathaway (NYSE: BRK-B  ) on their derivatives lobbying.

2) Go ahead, disagree. In Hertz's words we need to "create the space for managed dissent." She notes that by breaking down ideas and exploring wild, even heretical notions, we will become smarter and make real progress.

Once again, The Fool is all over this. Heck, just scroll down to the disclosure section of this article and you'll find the following: "We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors."

And we certainly practice what we preach. Nobody at Fool HQ had any problem with me writing over the summer about how much I hate Annaly Capital Management (NYSE: NLY  ) and that's despite the fact that The Fool itself had just bought shares. And when pundits were talking seriously about a BP (NYSE: BP  ) bankruptcy, nobody blinked when I stepped out to call the stock a buy. And these are hardly flukes or one-off occurrences -- The Fool truly believes that the best ideas will surface when we allow space for all views to be considered (even if they might be proven wrong).

3) We're all experts! "Democratize expertise" Hertz suggests. While we're used to kowtowing to folks in white coats and fancy suits, she points out that "normal folks" possess a surprising amount of expertise.

Surprising, that is, unless you're David Gardner. The community experience has always been a big part of The Motley Fool, but in 2006 we took that even further by introducing CAPS, a community where stock ratings are set by the views of thousands of community members. Has it worked? It certainly seems like it. In 2009 Harvard and Yale academics did statistical analysis on 1.2 million CAPS picks and found that five-star stocks (the highest rated) outperformed one-star stocks (the lowest rated) by eighteen percentage points on an annualized basis.

And what's better still is that not only can everyone contribute their ratings to the CAPS community, but they can also access the community's ratings as an investing tool. Through the CAPS screener, investors can track down stocks like Corning (NYSE: GLW  ) and National Grid (NYSE: NGG  ) that have perfect five-star ratings on CAPS and a price-to-earnings ratio below 12.

Get down on it
If there's one takeaway from all of this though, it's the need for your involvement. Sitting back and flipping off higher thought isn't going to work anymore.

Of course you can absolutely find the concepts above being practiced outside of The Fool and you can also apply them outside of investing. But if you want an easy way to take action now on at least one of these items, I would suggest setting yourself up on CAPS if you're not already.

Berkshire Hathaway and Costco Wholesale are Motley Fool Inside Value recommendations. Berkshire Hathaway and Costco Wholesale are Motley Fool Stock Advisor selections. National Grid is a Motley Fool Income Investor recommendation. The Fool owns shares of Annaly Capital Management, Berkshire Hathaway, and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of BP and Berkshire Hathaway, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (20) | Recommend This Article (49)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 24, 2011, at 11:43 AM, emphature wrote:

    Since Cramer recommended SodaStream (SODA) at about $34 in Nov...it's now trading around $40 for the past couple weeks.

    So yeah, thanks for contradicting him; I missed about a 20% gain listening to Rick's article "Cramer's Worst Call".

    Note: AND, just to pour salt right in the wound, Rick has since (Feb. 4th) recommended SODA as one of 5 smart stock picks:

    http://www.fool.com/investing/general/2011/02/04/this-weeks-...

    At that point the stock was trading at $42.50.

    So tell me, which "experts" should I be listening to again?

  • Report this Comment On February 24, 2011, at 2:46 PM, bmc007 wrote:

    line from the article;

    "our brains will shut down faster than a nightclub when Kenny G comes on"

    Poor ol' Kenny G - but very funny all the same!!

  • Report this Comment On February 24, 2011, at 3:29 PM, landoncz wrote:

    Rick was wrong about SODA just like he was wrong about JMBA: http://www.fool.com/investing/high-growth/2007/02/09/i-love-...

  • Report this Comment On February 24, 2011, at 3:49 PM, TMFKopp wrote:

    @emphature and landoncz

    If your only thoughts about this article is whether Rick was right or wrong about SODA then you've managed to completely miss the point.

    Matt

  • Report this Comment On February 24, 2011, at 4:39 PM, emphature wrote:

    @ Matt

    I have a lot of thoughts, but the article IS whether these other experts are right or wrong about their calls, so I think I've identified, smashed into, carved my name in and tattooed on my arm "the point".

  • Report this Comment On February 24, 2011, at 4:45 PM, emphature wrote:

    @ Matt

    What you're missing is that you should question others...when you actually have some credibility/knoweledge that allows you to do so. And it should CERTAINLY be so if you are going to act as an authority and claim you know what you are talking about...especially when you are going to target another person (as Rick specifically did in his article). Rick questioned, but does he have the experience that Cramer does? Did Rick do the background work to understand the company? When I read his article, it is clear that he did not because he misses so many major points about the company.

    Fact: When you have 24 hours to put out an article, you really haven't done DD...you've met a deadline and given an half-baked opinion.

    If Fool writers want to get credible, don't guess. That only hurts those of us who ASSUME you did some real research. That's my point.

    Respectfully...

  • Report this Comment On February 24, 2011, at 4:58 PM, emphature wrote:

    Here is the article Rick did after he did some real research on Feb 1:

    http://www.fool.com/investing/high-growth/2011/02/01/sodastr...

    If you compare the two, it is like night and day. All I'm asking is that people who come across as authorities and question someone else's opinion in a public forum should be held to some standard. This is particularly true if they are doing it with the knowledge that, in some small way, they are going to influence someone's financial decisions.

    Is that too much to ask?

  • Report this Comment On February 24, 2011, at 5:44 PM, xetn wrote:

    Does anybody believe this article should apply to Paul Krugman or Ben Bernanke?

  • Report this Comment On February 24, 2011, at 6:04 PM, TMFKopp wrote:

    @emphature

    "but the article IS whether these other experts are right or wrong about their calls"

    No, it's not. If that's what you got from the article then, sadly, I did a poor job. The article is about the fact that experts aren't always right and, therefore, it's not wise to blindly listen to them.

    As it pertains to the call by Rick that you're hung up on, the point isn't whether or not Rick was right, wrong, or crazy, it's that he offered a differing point of view -- he didn't simply sit back and say "Cramer's an expert so he must be right."

    And that's what we like at The Fool -- to hear lots of viewpoints rather than shutting down higher thinking and taking a party line.

    Matt

  • Report this Comment On February 24, 2011, at 6:30 PM, masterN17 wrote:

    @xetn: One hand raised over here.

  • Report this Comment On February 24, 2011, at 6:47 PM, eddiewillie wrote:

    you have to think for yourself you can read articles by the "experts" but it is your money you are investing with

  • Report this Comment On February 24, 2011, at 7:19 PM, Merton123 wrote:

    I believe that Matt wrote an excellent article. How many of us turn over responsibility for our physical health to doctors? When we take responsibility for our health by exercising, eating right, and doing our own research I believe we get a better result then having a doctor prescribe us a pill and we become like children.

    I enjoy reading the articles put out by Motley Fool. I normally limit myself to the main topic that they put out every day except for weekends. I have become aware of Netflix, Rosetta Stone, Bank of Hawaii. I also got to put in my 2 cents worth in the various commentaries. I don't feel guilty about not subscribing to the news letters since I invested over $10,000 in a Roth IRA in FOOLX. This means that I am helping support Motley Fool.

    I am impressed that day after day Motley Fool are able to come up with fresh ideas about the market.

  • Report this Comment On February 24, 2011, at 9:53 PM, TMFKopp wrote:

    @Merton123

    Thanks! Great to have you here.

    Matt

  • Report this Comment On February 25, 2011, at 11:28 AM, TMFSpiffyPop wrote:

    Great article, Matt. There's a key difference between articles and points made in Fooldom versus other places. That is, that most of our writers and so many of our community members -- all of you, and I would hope all commenting on Matt's articel -- take a stand by inputting public picks into CAPS. From there, anyone -- whether a long-time Fool or our newest visitor -- can see that person's record on CAPS to get a sense of how accurate they are, how effective they are in taking their stands on their picks. Good investors get it right more than 50% of the time. Great investors get it right about 66% of the time. Poor investors get it right less than 40% of the time. And not only does CAPS give you this percentage at a top-look, first-blush view, but you can look beyond the percentage to see HOW right or HOW wrong people are -- we calculate alpha right along with accuracy.

    Given that even great investors get it wrong a third of the time, that means that I guess anyone could show up on any investor website and rip someone for being an "idiot" for getting something wrong. The whole point of CAPS is to show a large body of work so that investors can judge the WHOLE ballgame -- not just criticize Babe Ruth for striking out, or make it sound like Bucky Dent is the best player ever for hitting a key home run.

    I wish for a world where all investment writers and thinkers -- whether from the Fool, Reuters, the Boston Globe, or Seeking Alpha -- put themselves on the line by picking accountably within CAPS. THEN, we could see their records, and see who had the guts to step up and make accountable picks. Right now, many don't. Virtually everyone at the Fool -- and I don't just mean our writers -- I mean all of you -- do. That's a competitive strength, and a gift we give our community.

    FYI, Matt Koppenheffer is rated a 98.57 -- he's ahead of more than 98% of all contributors (100,000+) to CAPS -- way ahead of Cramer, by the way. Rick Munarriz is rated 85.74 -- not as high as Matt, but an All-Star nevertheless.

    What's your rating? Fool on. --David

  • Report this Comment On February 25, 2011, at 12:36 PM, jimmy4040 wrote:

    "3) We're all experts! "Democratize expertise" Hertz suggests. While we're used to kowtowing to folks in white coats and fancy suits, she points out that "normal folks" possess a surprising amount of expertise"

    Phil Donahue said it first! No opinion is so looney that it can't be exploited to make someone money!

  • Report this Comment On February 25, 2011, at 12:48 PM, racchole wrote:

    Anyone who thinks negatively of this article is literally quite foolish. It is a general statement claiming that experts are hardly that, and we the people are just as capable as them, if only we educate ourselves. Plain and simple. Cramer is a real fool, and I think it is very hilarious that he makes a good pick (SODA?) and people are so quick to jump on his bandwagon.

  • Report this Comment On February 25, 2011, at 1:00 PM, jPfizzle88 wrote:

    I strongly agree with this article. Personal responsibility goes so much further than "expert advice". It's too easy for people to get laxodaisical and just take this "expert advice" at face value. The only thing depending on this advice without perosnal follw-up research does is give us someone to blame once things go to pot. I believe the broader application of this article is to not take any expert's advice at face value. While they have valuable insights and advice, nothing beats personal experience. It reminds me of the show Reading Rainbow I used to watch when I was younger. At the end of the show, Levar Burton would always conclude his segment on a book by saying, "...but don't take my word for it."

  • Report this Comment On February 25, 2011, at 2:53 PM, wolfman225 wrote:

    I first came to TMF after being exposed to the "Foolish Four". I understand that it has since fallen out of favor (not sure exactly why. Even if it only outperforms by 4-5%, as opposed to 20%+, it's simplicity makes it a good starting point for noobs). After lurking for awhile, I began a tentative foray into CAPS. I've done rather well, actually.

    I'm using my CAPS as LTBH, as opposed to active trading (that's why I have the "bomb" icon). Most of my picks have been positive and I have managed to limit my losses. My biggest "loss" in fact has been my decision to close out of Netflix WAY too early (I only made 80% on that one).

    I don't know how accurate the rating system is (I was as high as 80, and after a brief pullback am back up to just over 70.) as I don't consider myself any kind of an expert. I also set up my version of a "Foolish Five" account in Yahoo! Finance. In the last year, it's up nearly 24.5%.

  • Report this Comment On February 26, 2011, at 3:34 PM, gilsh wrote:

    execllent article , and i'll bear in mind to tell others about the shutting down brain when listening to an expert.

    it seems to me that the experts-discourse developing here is a rather surprisng angle. after all, the argument shouldn't be about "who is the best expert in kingdom", if anyone of us - expert or novice - had better use his own brain after listening to someone who apears to have mastered an area.

    I'll finish my two cents worth of a comment with Ford's famous quote on expertise. It summs it best in my mind:

    "None of our men are 'experts.' We have most unfortunately found it necessary to get rid of a man as soon as he thinks himself an expert -- because no one ever considers himself expert if he really knows his job. A man who knows a

    job sees so much more to be done than he has done, that he is always pressing forward and never gives up an instant of thought to how good and how efficient he is. Thinking always ahead, thinking always of trying to do more, brings a

    state of mind in which nothing is impossible. The moment one gets into the "expert" state of mind a great number of things become impossible."

    -- From Henry Ford Sr., "My Life and Work," p. 86 (1922):

  • Report this Comment On February 28, 2011, at 12:23 PM, jimmy4040 wrote:

    I love RB, but SODA 's chart just screams out stock manipulation. This company has more speculation involved right now than the price of brent crude. I'm a gambler by nature, but I know a crooked game when I see one.

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