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The expertise of experts

What makes someone an expert in savings and investments, and can you become your own expert?

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According to experts, you should trust experts with your savings and investments. In fact, experts think that you should trust experts with just about everything.

When I do a Google search for the phrase 'according to experts,' I get about 83 lakh results. That looks like a lot of faith being placed on experts, at least by the sort of people who write things that appear on the web. And yet, we are often accused of being in a 'post-expert' time, when people's faith in expertise is said to be waning. Are 'experts' actually experts? A few days back, I read a book by the 'undercover economist' Tim Harford where he recounts the story of a researcher who analysed how well experts could predict the course of international politics.

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This was in 1984 when the cold war was entering its decisive phase. Philip Tetlock was a young psychologist, part of the US National Academy of Sciences and was given the job of working out the possible Soviet responses to the new aggression in the US stance that President Reagan had brought in. He took the opinion of just about every expert on international relations that he could locate, but really got nowhere at all, the reason being that there was no agreement between experts at all. No matter what the opinion, there was some expert or the other who held it.

Tetlock made this a long-running, carefully conducted research project. He asked experts to provide quantifiable estimates for the questions he asked and over twenty years, he came to the conclusion that experts' forecasts almost never came true. Interestingly, Tetlock found that experts were not completely useless. Like any good researcher, he had a control group of non-experts and found that experts did do better than the control. However, they weren't better enough to be actually useful. In fact, he discovered that more famous experts were actually less effective but that's probably a failure of fame, not the expertise.

What Tetlock's research boils down to is not that expertise is useless but that it does not go far enough in providing definite, usable answers about the future. If anyone is looking for a readymade answer from an expert, then that is highly unlikely to be available. Moreover, experts who claim a high degree of expertise are disproportionately less likely to be of help in such forecasting.

So what does this mean as far as getting expert help in your savings and investments go? It means that you should not look to experts for predictions about what will happen, and I say this with full awareness of my public position as an expert who sometimes says things that may sound like predictions. Essentially it means that everyone needs to think for themselves, at least a little bit, and what an expert could provide is a framework within which the investor could work. It's actually a matter of predictions vs principles. Predictions don't work, principles do.

Differentiating between the two is easy enough. When you go out looking for advice on investing, you can come across something like, 'XYZ company's EPS will grow 17 per cent next year and I expect the stock price to reach Rs 400.' There are a lot of statements like this, along with roughly equivalent statements about other asset classes like mutual funds or commodities. These come from the Tetlock class of experts. The precision of the predictions alone means that they are just a vacuous claim to establish expertise that does not really exist because the first thing that an expert recognises is the limits of expertise.

The problem with these precise predictions is not just that they are wrong, but that they establish a false expectation. THIS is what experts sound like, savers observe. Therefore, they conclude, only those who sound like this must be experts. Even worse, savers decide that since they themselves do not know how to make such predictions, they must stay dependent on such experts.

None of this is remotely true. It takes very little other than commonsense to be one's own expert, and that's something we'll discuss in the weeks to come.

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