The Dangers of Following People Who Are Never Wrong

This post concerns an article in the May 2021 edition of "Luckbox," the magazine published by the TastyTrade team. The title is "The Cost of Overconfidence." It's a good article that raises questions about how we receive information. Are experts reaching people with financial considerations, or are overzealous teens on TikTok shilling Safemoon reaching a bigger audience than actual educators? This post summarizes my point of view after reading it.

Overconfidence can be expensive

Overconfidence can lead us to act impulsively or to ignore counterpoints to our views. This can be particularly dangerous when we are trading stocks or options and putting money on the line. Overconfidence will likely lead to major losses.

And yet, when the average person watches finance-based television, YouTube, or even worse, TikTok, the typical talking head speaks with massive confidence. Our culture continues to overvalue bold statements.

TikTok user talking about Dogecoin reaching $100: 1.2 million views
Squawk Box pundit insisting GME is overvalued at $50: airtime, contracts, retweets
Hedge fund analyst calculating fair valuations: -35% AUM since Aug 2020

Society rewards people who speak with conviction despite their spotty track records because a confident "yes" and "no" are more satisfying answers than "maybe" will ever be. This explains why the attention goes to loud but inexperienced social media influencers no matter how shaky their records of providing actual financial insight. 

As a result, the casual trader is constantly exposed to people who speak with conviction even when they don't have any answers. This leads to people being misled, because it is hard to not follow someone who insists they have answers.

Conversely, people who speak in terms of "however" or "on the other hand" never capture as much attention even though their evaluation is likely more complete. The world does not exist in certainties. The people who know the most are the ones who caveat their statements, and casting doubt is a turn-off when you're explaining to people how they should invest their money.

The sense of security that comes with following convicted speakers is satisfying. But it is an illusion. The cost of the illusion can be steep when you toss your money into Bitconnect.

Dunning-Kruger's Role

The article didn't discuss this at all, but it fits perfectly. The concept of Dunning-Kruger describes how people who know very little about a subject beyond the very basics tend to be extremely confident in their abilities.

Have you ever met someone who watched a Netflix documentary and thinks they're now an expert on global warming? Or someone who took Spanish 101 and puts "Spanish speaker" on his resume? We all know how quickly witty memes trick people into battle with strawman arguments. 

The same thing happens when someone watches a few YouTube videos on dayrading. They ride right up the peak to Mt. Stupid as they learn the vocabulary. There is a reason things seem easy in the beginning. You're only learning the easy part.

Get to the second step of trading and learn how options work. They're tricky, and learning about them leads to frustration as the trader realizes learning how to open an iron condor is harder than learning some basic terms. Learning new material can be discouraging. 

It isn't until the trader learns everything there is to know about a topic before his confidence returns. The people who know the least tend to be the most confident.

What does this mean for us? When you find someone on social media who talks about stocks as though they have all the answers, inverse them. More seriously, look inward to determine if the individual speaking displays any evidence of understanding counterarguments.

You can't defend your thesis in a 40-second TikTok video. But if the speaker offers you nothing but empty information - as in no supporting statements and no warnings of caution beyond the classic, "this is not financial advice" - then proceed with caution. The world rewards confidence even if that confidence is misplaced. 

Protect yourself by looking to the arguments someone makes, and look to shoot holes in it yourself. Think Dogecoin can reach $10? Maybe, but keep in mind that would make Doge worth more than $140 billion. It's possible, but that that's about ~12% of BTC. If Dogecoin $10 makes sense coming from a TikToker's mouth but DOGE being 12% of BTC does not, then you know what to do.

In a world that overvalues confidence, sleep on important decisions first and keep a grain of salt on you at all times.