Trust, but verify.
Those of a certain age will remember this as one of US President Ronald Reagan’s favourite phrases when he was in office in the 1980s.
‘The Gipper’ used the old Russian proverb to describe his approach to US nuclear disarmament talks with the USSR. This was much to the amusement (or perhaps exasperation) of his opposite number, Mikhail Gorbachev, General Secretary of the Soviet Communist Party, who told him, “You repeat that at every meeting.”
Whatever your politics, ‘trust but verify’ is a good rule of thumb when it comes to believing what you read or see in the media, or when someone is trying to persuade you to do something that carries inherent risk (like choosing a particular investment).
Despite what we’d like to think, we all encounter things on social media and in the press that we want to believe, because they comply with our own values and biases. We have an emotional response to much of what we see, hear and read, especially over the last couple of years.
Let’s face it, it would take a heart of stone or the brain of a robot not to respond emotionally to some topics. Words like ‘climate emergency’, ‘immigration’, ‘guns’, ‘Brexit’, ‘vaccines’ and ‘lockdown’ can generate a visceral reaction.
We respond instinctively; they’re ‘trigger words’ and our own personal values and confirmation biases can mean we perhaps don’t dig deep enough and look at the facts.
When it comes to money, the same rules apply. Words like ‘hot stocks’, ‘unbeatable opportunity’ and ‘market crash’ can make us think about doing things with our portfolio that we probably shouldn’t.
Of course, marketers use this technique all the time. The more emotional we feel about something, the more we like, share and possibly buy.
It’s not all bad, of course: charities rely on triggering our emotions to encourage us to donate or volunteer for a good cause. But so do commercial organisations selling products you wouldn’t really want if you looked a little deeper and engaged your critical faculties.
It’s one thing to wonder if a news story about a politician or celebrity is correct. But we’d argue you should pay even more attention if the other party is asking you to part with your money.
How do you sort out the baddies from the goodies?
Do your fact-finding due diligence and check your biases when you see, hear or read something new that makes you feel like sharing or buying.
Unless you can prove it’s right, assume it’s not. Don’t let confirmation bias – the fact that it accords with your views – blind you to the possibility it might be complete rubbish.
Ask: why do they want me to believe this? What’s in it for them? Don’t let familiarity bias get in the way: the tendency to accept something because you know the person who’s selling it, or they’re a big name and you’re used to people talking about them.
Also ask: who is it asking me to do this? Scammers, for example, can be extremely good at making emails and phone calls look and sound genuine, leading otherwise savvy people to transfer the contents of their bank account to that of a plausible trickster. But even legit businesses can persuade you to do something you may regret in hindsight.
Check them out. Comb through their website. Look at independent reviews. Check that what they’re saying stands up to scrutiny. Blind spot bias means we often are well aware of others’ cognitive biases but don’t see the same mistakes in our own behaviour.
If we see something repeated again and again, it can seep into our brain and we believe it, even if we were sceptical the first time we heard it. Hindsight bias leads us to believe what we see now, and perhaps forget the unease we felt when we first encountered the claim.
Herd mentality often leads us in the wrong direction. If it’s a good deal today, it will be tomorrow. Don’t let anyone hurry you into making a financial decision you will live to regret just because ‘everyone else is doing it’.
Three checks anyone can do
Reality check. Is it really true? Fortunately, there are a number of online fact checkers who do the heavy lifting for you. So next time something sounds just a bit too far-fetched, check it out on Snopes or fullfact.org.
Google it. Scroll down through the ads and marketing websites until you come to reputable journalistic, academic, scientific or independent trade websites or publications and see what they say. If the only result that comes up is the link your friend sent you, then you (probably) have your answer.
Find the source. Dive deep into the links until you arrive at the peer-reviewed academic paper, recording of the actual speech or other original (nor reported) source. Get it from the horse’s mouth.
It’s in your interests to make sure the news and information you act on is the truth, the whole truth and nothing but the truth. Emotional reactions may be more exciting but, when it comes to investing, base your decisions on the evidence.