Skeptical Financial Decision Making

How to Be Positively Skeptical: Part 2

In previous installments of our “How To Be Positively Skeptical” series, we covered the many forces that tease us into falling for misinformation. Bottom line, our brains are hardwired to lead with fight-or-flight instincts ahead of rational resolve. As such, our critical thinking often plays second-fiddle to rash reactions such as fear, excitement, overconfidence, and regret.

 

“All media shares one thing: Someone created it. And it was created for a reason. Understanding that reason is the basis of media literacy.”

Common Sense Media

 

In the financial jungle, it’s essential to look before you leap at emotion-triggering misinformation. Here are five “do’s” and “don’ts” for doing your best fact-finding due diligence.

 

  1. Do be positively skeptical. In the courthouse, a defendant is presumed innocent until proven guilty. When managing information overload, we recommend you default to exactly the opposite: When in doubt, remain in doubt until you’ve done your due diligence.

 

Also watch out for confirmation bias. If you want something to be true, you’ll be more inclined to believe it is. Likewise, if you wish something weren’t so, you’ll assume it probably isn’t.

 

  1. Do question the motives. As suggested above, everything you see, hear, or read is driven by someone’s incentive for sharing it. This helpful Life Kit Comic from National Public Radio describes at least four potential motivations: self-interest, malicious intent, financial gain, and/or genuine altruism. Determining which motivations are most likely at play suggests how readily to accept a claim as the whole truth, and nothing but.

 

Also watch out for familiarity bias. We take mental shortcuts to more quickly trust people who are familiar to us, whether or not our trust is well-placed.

 

  1. Do consider the source. Motivation aside, does the source actually know what they’re talking about? If they’re sharing their own insights, do they have the credentials and/or experience to be accurate and objective about the subject matter? If they’re reporting others’ insights, have they first done their own due diligence? Is their “evidence” fact-based, first-hand, and objectively considered? Or is it opinionated, emotionally charged, and largely circumstantial?

 

Also watch out for blind spot bias. We can more objectively spot others’ behavioral biases than we can recognize our own. This is one reason why even a well-intended individual may be unaware of their own misperceptions.

 

  1. Don’t let repetition replace reality. Believe it or not, simply repeating a lie can make it more believable. Citing a pair of studies from the Journal of Experimental Psychology, this Wall Street Journal columnist reported, “When people hear a false claim repeated even just once, they are more likely to let it override their prior knowledge on the subject and believe it.” This all too real “illusory truth effect” explains how effective marketing campaigns often work. It also explains how we can fall for fast-moving falsities, whether unwittingly or intentionally repeated.

 

Also watch out for hindsight bias. Hindsight bias tricks us into altering our memories to reflect current reality. In other words, once you decide to believe a repeated claim, you may forget you didn’t believe it the first time.

 

  1. Don’t rush. Especially in money management, anything that is important today will still be important tomorrow. Take your time, ask critical questions, and ensure you understand the ramifications before you make any move. The same applies when sharing tantalizing social media posts. If something strikes you as either outrageous or too good to be true, avoid getting caught up in the heat of a moment, lest you accidentally fan the flames of an illusory truth.

 

Also watch out for herd mentality. Herd mentality intensifies our greedy or fearful reactions to breaking news. We are prone to run in whatever direction everyone else is headed.

 

How Do You Do Your Due Diligence?

Of course, nobody can research every claim they come across. There are only so many hours in the day! So, what are some practical steps for efficiently differentiating fact from fiction? We’ll cover that in our next, and final installment in our “How To Be Positively Skeptical” series.

 

There are only so many hours in the day to do all the fact-checking you’d like to when deciding who and what to believe.  How do you approach this never-ending challenge? We suggest conducting your due diligence like a tournament. First, eliminate the weakest contenders, then conduct deeper due diligence on the finalists.

 

Truths and Dares

This does NOT mean you should disregard all opposing viewpoints. As you may recall from our last piece, confirmation bias causes us to favor information that supports our beliefs and ignore that which contradicts them. But what if your beliefs are mistaken? One of our goals is to combat confirmation bias by considering any reasoned argument that:

 

  1. Is well-informed, with an objective perspective and minimal conflicts of interest
  2. Prioritizes judicious decision-making over strident calls to immediate action
  3. Inspires a thoughtful approach to touchy topics, instead of feeding fervent fires

 

In other words, when considering whether a claim is credible, it doesn’t matter whether or not you agree with it. What matters is whether it represents a genuine pursuit of the truth.

 

Be particularly wary when you come across startling information – good or bad – filled with superlatives. As this Wall Street Journal article reports, we are all subject to extremity bias, or “our tendency to share the most extreme version of any story, to keep our listeners rapt.” Thus, even if a provocative claim contains an element of truth, it may be overblown.

 

Once you’ve eliminated the weakest claims, you can fact-check the rest.

 

Start With a Reality Check

Does a claim make you wonder, “Really?” Especially if it’s a relatively extreme position, a good first step is to refer to one or more fact-checking resources, such as Snopes, Vote Smart, or FactCheck.org. While none of these are infallible, you should be able to at least filter out any flagrantly false claims before sharing them with others or acting on them yourself.

 

Just Google It

Next, use your favorite search engine to learn more. Don’t just depend on the most popular hits. Just as you wouldn’t turn to tabloids to tell you whether aliens really exist, you should avoid the tabloids’ virtual equivalents and turn to reputable sources offering educated insights.

 

Examples of more robust sources include academic and similar philanthropic institutions, respected journalists, government publications, quality trade organizations, and subject matter experts with appropriate credentials.

 

As we’ve covered before, be sure to consider the source’s dominant motivations, their depth of experience, and their thoughtful vs. emotional approach. Ideally, identify multiple credible sources to substantiate, strengthen, and/or clarify any given claim.

 

Seek the Source

Merely stating a fact does not make it so! When sharing facts and figures, the author should explain how they came up with them, and/or cite a reputable source. Beware if it’s instead left unclear just where the claim came from.

 

Whenever possible, take the time to verify and confirm the validity of original sources. If the author has not provided the links, an Internet search often uncovers them. By the way, don’t be too daunted to read through academic studies or similar reports. Like any skill, it gets easier over time. Plus, cited information is often found in the study’s abstract, introduction, or conclusion.

 

Academically Speaking

While we’re on the subject of academic research, let’s take a closer look at its use, and potential abuse. At least in theory, academics are motivated by discovering and publishing their most objective findings. As such, their findings are typically the gold standard for evidence-based understanding.

 

That said, even academics are human. They are subject to the same biases and misjudgments as the rest of us. Highest priority should be given to studies that exhibit a disinterested outlook; are based on robust data sets; can be reproduced by others and repeated across multiple environments; and have been published and rigorously peer-reviewed.

 

That last point is important, since an academic’s peers are best positioned to spot any flaws the author(s) may have overlooked. Consider this Scientific American report, describing how a set of psychologists peer-reviewed a series of studies on how social media impacts our youth. While it may be headline-grabbing to publish evidence suggesting smartphones are bad for children, this peer review suggested that misleading data analyses and overstated results needed to be replaced with “a much more nuanced story.”

 

The Advisor’s Essential Role: Separating Fact from Fiction

If we’ve not made it clear by now throughout this series, our own and others’ behavioral biases present among your greatest hurdles in separating fact from fiction.

 

As information consumers, we’re inherently susceptible to falling for fake news (especially when we’re tired, by the way). Our challenge is further aggravated by the droves of information out there that is unwittingly or deliberately false.

 

We hope this series has strengthened your “B.S. detector” as you make your way in the world. At least when it relates to financial planning and investment management, we also consider it among our greatest roles as a financial advisor to help families strengthen their financial literacy, see past their factual blind spots, and separate wealth-building facts from fantasy.

 

Please let us know if we can help you with the same.

 

 

 

 

 

Woodstone Financial, LLC is a fee-only financial advisor, specializing in retirement planning, comprehensive financial planning, and investment management firm located in Asheville, North Carolina.   Contact us to learn more about our services.