Why Do People Pay for Useless Advice?
Good paper here on irrational behavior and the tendency to pay excessively for things due to recency biases and pure irrational thinking. I don’t entirely agree with the premise (random walk), but it’s a thought provoking paper and should certainly be considered when structuring a portfolio that could fall into the trap of suffering from fee drag on overall performance.
“Why do humans pay for advice about the future when most future events are predominantly
random? What explains, e.g., the significant money spent in the finance industry on people
who appear to be commenting about random walks, payments for services by witchdoctors,
or some other false-expert setting?Traditional economists attribute such behaviors to random error in decision-making.
This is the notion that an average person is disinclined to commit such errors, and that people
rationally pay for advice only if it does not seem logically counterintuitive at the time of
purchase but that is potentially useless ex post. By contrast, psychology literature assumes
that human beings are hypersensitive at detecting agency, even when none exists, to help
them to explain phenomenon that cannot be easily explained (see, e.g., Barrett, 2004). This
implies that on average people will be happy to pay for advice that is generally
counterintuitive to their objective reasoning if they believe there is an intelligent agent
making the decisions for them. Such an apparent divide between the two social-science
disciplines is scientifically unattractive.Our paper focuses on a situation in which there is true randomness and predictions are
transparently useless. In this setting of non-existent expertise, can an average individual be
convinced to switch from having the correct belief that “outcomes are independent and
predictions are inherently useless” to the false belief that “predictions provide useful
information about the future” – thus leading them to buy subsequent predictions in the future
– if they had recently observed a streak of perfect predictions being made in front of them
live? We found that the answer is yes and that the size of the error made systematically by
people is large.”
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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9 Comments
Take the academic side out – 99% of the population pay to not have to deal with the complexity themselves which, surprise surprise, includes the academic paper with these findings!
Ahhhh….the academics. The Krugmans of the world. Once again they put out a long esocteric wonkinsh piece filled with…a formula I tried to cut and paste on page 6 III. Econometric Specifications that was just silly.
Why do people pay for useless advice? The same reason the istitue of Study of Labor in Bonn and the Deutsche Post foundation supports useless research papers and doctoral programs. With out people paying for useless things…this paper would have never been written.
I could save everyone some time. I mean everyone. Including Riyanto, Powdthavee, the donors, the research foundations, IZA the independent non profit by giving the academics some STREET WISE ADVICE. (and not Wall St. but the real street…where you don’t need a PhD to make money)
People pay for advice because they want to be told what to do. They want someone else to make the decision. It’s the same reason why my father in law who has 2 PhDs and has written 15 books your univeristy studies and lectures all over Asia(just retruned from China last week) is the worst investor next to Krugman and Roubini. He pays for advice because his internal investor is more uselss than the advice he’s getting.
I had a coworker once who gambled excessively on sports. He subscribed to multiple tip sheets, “insider” newsletters, etc. Yet our office pools were inevitably won by a secretary or some other uninformed individual.
I asked him once why he paid all that money for the tip sheets, and he said, “So I know it’s not my fault if I lose.”
I suspect that is a motivation, conscious or not, for a lot of people.
Worse than paying for usless is advice is posting on a site disparringing things about your father in law. If my wife or mother in law saw this post I’ll be paying for useless advice from a divorce attorney!
People are irrational and spend most of their time explaining and proving why they are so rational.
All the charting that goes on is interesting. Charts are “scientific”. The data studied is a proxy for human behavior in relation to past events or no events. There is a tendency to take the process too far and to claim to much predictive behavior based on past outcomes, even though the future is not known with any precision.
Anonymous- Then you should not use charts. You rationly or irrationally have come to the conclusion they dont’ serve a purpose. In spite of the fact they work. You believe they don’t…so you live and act based on that.
Me- I love them. I never turn down any tool that can helpm me speculate, invest, what ever you call it. Funny- the regulators call short term trading speculating but have no problem with mutual funds who have 200% turnover??? And I’d point out….neither do the most succesfull funds. Why would you ever turn down something that can help you? Even if you though it was useless…if you were smart you’d use it against those who use it.
I don’t get academics—they spend too much time wanting to be smart.
ME- I use everything. I pay for useless advice. I’ve got 10 services I pay for. Do I use them all? NO…but each one provides help. Some day…buy and hold will be the best strategy. But for now…I’ll take my charts and coin flips. Heads I buy…and right now my Marines Special Froces Bravo Broad Sword Coin is lying on the ground Heads down. I won’t be moving it…and when the clearners come in Sunday night…they know not to touch it.
Confirmation bias, that’s why most people pay for ‘useless advice’. To confirm their own views on something.
Remember, if anyone actually was a true predictor of future prices, everyone would use it and thereby negate its value.
And of course this is the hope of the contrarian specultor.