Here’s a great excerpt from Daniel Kahneman’s Keynote Address at the Amundi World Investment Forum – AmundiWIF19. Kahneman provides his thoughts on whether investors can develop expertise in picking stocks saying:
Confidence & Expertise
Can you develop expertise in picking stocks? This is very doubtful. In fact, it is probably not the case, because it is such a highly irregular environment.
Important aspects of the psychology of investors and of decision-makers in general are confidence and expertise. What is the origin of confidence? Most of the time, we feel considerable confidence in our opinions and our beliefs. In fact, we are generally over-confident. According to research, this is what causes excessive trading and it clearly causes a lot of trading in general. This is key – and psychological research is fairly unequivocal on the matter. Confidence is not a very good indicator of accuracy. You can have confidence in opinions that are not accurate at all. Confidence is primarily a feeling, and it is the feeling of coherence of the story that you are telling yourself. If the story that you are telling yourself makes sense, and makes subjective sense, then you feel confident. It has very little to do with the quality of the information on which the story is based.
Expertise and true confidence – valid confidence – is really something quite different. Expertise is something we know — we know the conditions under which expertise develops.
Expertise has two conditions and they are quite clear: first, you cannot develop expertise unless the environment is regular and there are consistencies to be internalized. You can develop expertise in driving, for example, or in chess. You can develop expertise in poker, because, although there is a large element of chance, there are also regularities. But can you develop expertise in picking stocks? This is very doubtful. In fact, it is probably not the case, because it is such a highly irregular environment. The second condition is a vast amount of practice with immediate feedback. You have to know the consequences of the action: the feedback has to be clear, rapid and unequivocal.
In the absence of these conditions, the confidence that you experience is not “good” confidence. In general, if you want to know whether to trust somebody’s experience and expertise, you should treat it as you would treat a work of art. The most important element is not what it looks like. The most important element providence – where does it come from? Does it come from true expertise, or does it come from what many of us call judgment heuristics, which are very different processes, which also give rise to confidence, but are not based on the same thing.
You can find the entire keynote address here – Daniel Kahneman Keynote Address | Amundi World Investment Forum – AmundiWIF19.
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