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.
