This article is part one of a four-part blog series about training yourself to make better financial decisions.
Financial pundits and newscasters delivering so-called information have never been more prolific. Not to mention, continual advances in technology make it possible for us to access financial headlines, news, and opinions any time of day or night. When you consider the fact that the average American checks their phone approximately every 10 minutes, it’s easy to see how so many people become overwhelmed by information overload—and thus, make poor financial decisions.
Whether you’re seeking advice, considering a new investment opportunity, or simply browsing various media for insights and entertainment, one thing is for certain: You can’t believe everything you see, hear, or read.
Want To Make Better Financial Decisions? First, Develop A Healthy Sense Of Skepticism.
Much of the information we get from the media is “overdramatic,” designed to trigger an emotional reaction from those who consume it. And too much of the rest is just plain wrong. The problem is, it can be difficult to separate the bad information from the information that’s actually useful and important.
As investors, business owners, and citizens, it will always be our responsibility to seek the truth so that we can make informed decisions. But in today’s information-saturated culture (i.e., the internet, social media, and 24-hour news cycle), getting to the truth is no easy task. The very features that make online engagement so popular also make it a powerful forum for sowing deceit and confusion.
So, what’s the average investor to do? If you want to make better financial decisions, it’s critical to be positively skeptical about what you see, hear, and read.
To be positively skeptical, we must continue to think and learn and grow.
But we also must aggressively avoid falling for hoaxes and hype.
Here are two key ways you can develop a healthy and positive sense of skepticism, so you can make better financial decisions without avoiding new information altogether.
1. Consider The Source
It’s now all too easy to share a claim far and wide, long before it’s been through any sort of reality-check. One or two clicks, and it’s on its way. In fact, evidence suggests false online news spreads faster than the truth.
In a March 2018 Science report, “The spread of true and false news online,” a team of MIT researchers analyzed approximately 4.5 million tweets from some 3 million people from 2006–2017. They found that “Falsehood diffused significantly farther, faster, deeper, and more broadly than the truth in all categories of information.” The authors also found that “human behavior contributes more to the differential spread of falsity and truth than automated robots do.”
In other words, we can’t just blame it all on “the bots.” We owe it to ourselves to be vigilant. And while you should consider the source of anything you hear or read, this is especially important if you tend to get your news from social media. These algorithms are designed to show you stories that are trending among the individuals and entities in your network. So, before accepting everything you read on these platforms as fact, ask yourself if it came from a credible source and why it might be so popular among the people you choose to follow.
2. Do Your Due Diligence
Even if we had all the time in the world to do so, few of us actually enjoy engaging in detailed fact-checking. That’s not entirely our fault. It’s likely due to a multitude of mental shortcuts, or “heuristics,” which we have honed over the millennia to make it through our busy days.
In their landmark 1974 paper, “Judgment under Uncertainty: Heuristics and Biases,” Nobel laureate Daniel Kahneman and the late Amos Tversky are widely credited for having launched the analysis of human heuristics, including when they are most likely to lead us astray.
Essentially, most of us are more likely to share and comment on a social media post than to take the time to substantiate its accuracy. Academic research that refutes current assumptions can be dense and difficult to decipher; if a particular assumption is already widespread, we’re prone to simply accept it as fact.
Unfortunately, there are legions of cunning con artists and slick sales staff who know all this and have weaponized our behavioral biases against us. That means it’s critical to do your due diligence—whether you’re consuming new information, receiving advice, or evaluating a new investment opportunity. In other words, don’t assume widely held beliefs are also true. Be sure to check the facts before adopting those beliefs for yourself.
Healthy Skepticism Should Reward You In The Long Run
In this multipart series, we’ll explore how strengthening your fact-checking skills can help you make better financial decisions. In the next post, we’ll dig into how emotions can affect your decision-making—and how to control them, so they don’t control you. Be sure to bookmark our blog and check back frequently as we’ll be posting more helpful resources throughout the series.