Many said the automobile wouldn’t take off (modern day traffic jams are just one sign of how popular cars have become). Listening to the experts doesn’t always pay off. But in some cases it can.
Following the lead of successful innovations – in the manner of electronics firms that produce their own tablet devices – is called the “imitate the successful” heuristic by psychologist Gerd Gigerenzer. It can be a low-cost way for big business and ordinary people alike to save time and money. But knowing which expert views to listen to – which to imitate – is key.
Lessons from the experts: When it’s the same on the inside
One example of experts knowing how to save on everyday purchases was highlighted by the Dutch academic Bart Bronnenberg and colleagues from the United States in August 2014. Using data on seven years of shopping records, they found that more informed customers were more likely to buy cheaper store-brand goods. They found pharmacists and nurses – people with expert knowledge about healthcare – for example, bought store-brand headache medicine 91% of the time compared to 74% for the average consumer.
Similarly, they found chefs bought store-brand baking products 77% of the time compared to 60% for the average consumer. The pharmacists and the chefs knew the specific ingredients to look out for and ignored the nicer packaging on the more expensive brands to get the cheaper option.
Lessons from the experts: The “store-brand” of investments
Saving tricks like this aren’t limited to trivial grocery decisions. They also apply to one of the most complex decisions an investor can make: how to invest in the share market. With hundreds of thousands of companies in the world, how can the average person possibly decide which one to invest in?
Fortunately, there is one ”store-brand” investing option that experts have recommended for decades. In a survey by the Chicago Booth IGM panel, 89% of economists agreed that “an investor can expect to do better by choosing a well-diversified, low-cost index fund than by picking a few stocks”. Here the experts know the importance of avoiding high management fees and managing financial risk as a reliable way of guaranteeing a steady return over time.
Know when to ignore the experts
Just as important as listening to expert advice, is knowing when to ignore it. Like the media commentators who predicted that the iPad would fail, or economists who failed to predict the recent recession, sometimes people who seem like experts can be totally off the mark.
In order to spot the difference, Nate Silver, author of The Signal and the Noise, emphasises the difference between risk and uncertainty. Experts can compare two bags of sugar or look at decades of stock market data and, because these are relatively stable and unchanging environments, measure the risks involved and make the best decision with the information available.
On the other hand, the experts who predicted the iPad would fail looked at the existing market for computers and smartphones and saw that there was nothing successful that looked like a tablet. The problem was that the iPad wasn’t just a bigger smartphone (or a smaller desktop computer), and no-one really knew how consumers would react to it. As is usually the case when trying to predict the future, the experts were dealing with a highly dynamic, uncertain environment and consequently their judgement was no better than the ordinary person.
No-one is capable of developing the judgement needed to make intelligent and informed decisions in all areas of life. By knowing when to follow experts and when to ignore them, we can save ourselves a lot of time and hassle.