Accuracy Not Confidence

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Confidence and hubris are abundant in the investment world, especially in bull markets. Everyone claims to know where the market is going, what the Fed will or should do, and what the next great idea is. Just ask, and you’ll have plenty of people talking about their can’t-miss ideas.

Confidence is infectious. We all want to know what the market is going to do. We all want to know when the next big crash is coming. We hate uncertainty. So anyone that can remove that uncertainty has our attention.

But it’s not confidence that we want. It’s accuracy. Accuracy in the sense of actually making investment decisions that succeed long term.

Confidence is about predicting success. Accuracy is actually delivering it. That’s a big difference.

Confidence doesn’t improve accuracy; it only appears too. Confidence has no bearing on whether a decision is good or bad. Decision quality depends on your diligence, research, understanding, and timing.

Confidence is often substituted for good decision making. Confidence can be faked. It’s easy. It’s a shortcut. Confidence allows us to close the book on a decision and feel good, no matter how poor the underlying analysis or recommendation. Confidence allows us to skip the hard work of realizing that all investment decisions are full of unknowns that will never be resolved. It’s all about probability, not certainty. Many choose to neglect that fact; the best face it head on.

There’s a tendency to seek out people that are highly confident. Confidence is good, in most domains. But not false confidence. Not in investing. False confidence in investing gets you killed. Those with excessive false confidence are rarely aligned with you. They win if you transact, not whether the decision works out. Confidence breeds action, not careful analysis.

Be careful of being hooked by confidence. Be hooked by thoughtful analysis. Be hooked by logical thinking. Make people prove it. Don’t just trust people when they say they feel really good about an idea. Anyone can say that, and most do.

As legendary film writer William Goldman said, “Nobody knows anything,” when asked about predicting what films will succeed.

It’s no different with investing. It’s a game of probabilities and surprises, most of which are unknown.

Every time a claim is made, whether by a colleague, manager, or salesperson, ask yourself: is this a confident, yet empty, unverifiable claim? Or can I uncover and assess the claim’s underlying rationale?

As Maria Konnikova, author of The Confidence Game: Why We Fall for It…Every Time, states:

It wasn’t the people who saw the world most clearly who did best; it was, rather, those most skilled at the art of seeing the world as they (the victim) wanted it to be. And the world-as-we-want-it-to-be is precisely what the con artist sells.

Confidence sells us on the idea that someone has it all figured out and works best when we are willing participants.