“I only invest in real estate because it’s tangible,” or “the stock market is just too risky,” are examples of statements we hear often from potential clients in initial meetings. This is particularly so when one spouse or partner, has been convinced by the other to meet with a financial advisor. The statements themselves don’t particularly bother me, since they contain both shreds of truth and potential red-flags, depending on the circumstances. But whenever I hear statements like this, I know there’s a good chance I will be facing an uphill battle in trying to frame the concepts of risk and volatility, and ultimately, in helping that person achieve success investing in the stock market over the long-term.
That’s because statements such as these indicate that the speaker probably suffers from two traits that I believe are quite detrimental to investing – overconfidence, and the lack of intellectual humility. Both characteristics, to my way of thinking, are antithetical to a growth mindset, which, not coincidentally, is widely believed to be a key component to both academic, and investing success.
In a previous blog post titled “Are Women Better Investors Than Men,” we discussed overconfidence, and the adverse effects it can have on investing outcomes. The main source for that argument came from a 1998 paper by Brad M. Barber of UC Davis and Terrance Odean of UC Berkeley titled “BOYS WILL BE BOYS: GENDER, OVERCONFIDENCE, AND COMMON STOCK INVESTMENT.” The authors estimated that the result of such overconfidence was a roughly 1% per year under-performance in investing returns by men versus women, over time.
While the ramifications of overconfidence have been fairly well established, what about intellectual humility? The ability to look honestly at oneself in any given situation and say, “I didn’t think of it that way,” or “maybe I’m looking at this from the wrong angle” – that is, being intellectually humble – doesn’t come easy for most people, but it can have profound effects on one’s eventual success in many areas of life. The question is, in a culture where confidence is admired and making mistakes is a sign of weakness, how does one truly develop a growth mindset, and intellectual humility? In an article titled “The Benefits of Admitting When You Don’t Know,” University of California, Davis researcher Tenelle Porter discussed the studies she has performed on intellectual humility with students. The results suggest that those students who were intellectually humble not only performed better in school, but were actually able to change the way they learn in positive ways. She concluded that intellectual humility and a growth mindset go hand in hand, and that much more research is needed to clarify both the connections, and the differences between the two traits. Nonetheless, the early evidence from her research points to a strong impact on learning and intellectual growth.
The truth is that most folks who come to see a financial advisor have had some measure of success in accumulating wealth, otherwise, they likely wouldn’t need someone to help them manage that wealth in the first place. It is also true that many of them have made some mistakes with that wealth in the past. It is only from experiencing, or watching someone else experience loss, that inflexible statements such as “the stock market is just too risky” tend to be uttered. It is the combination of those experiences, plus the overconfidence and lack of intellectual humility found in so many who have managed to become successful in their own professions, which can conspire to cause such people to reject potential strategies and solutions in dealing with their finances.
For those who are wired this way, it doesn’t matter how many times I explain that they are guaranteed to run out of money in retirement due to the erosion of purchasing power by inflation if they keep all of their money in cash. They will still see cash as safe, and the stock market as too risky. And I can explain until I’m blue in the face that having all of your investable assets in one asset class presents its own specific kind of risk to a long-term portfolio, but it just won’t sink in. This is because when you’re stuck in that fixed mindset, what you really need to find, is a way to say, “maybe I don’t know” or, “perhaps I should be looking at this another way.” The good news is that if you can come to such a recognition, all of the research suggests these traits can be altered – you just need to open the door to that “maybe”.