At a recent conference, my firm used the “guess-the-number-of-jellybeans-in-the-jar” trick to boost traffic. The results of the contest were thought provoking.
Since you are all now wondering how many jellybeans were in the jar, I will relieve the suspense and tell you. There were 3,745.
But the guesses were all over the map. They ranged from a low of 274 to a high of 9,779. The winning guess was 4,000 beans – about 7% off the actual number.
The average of all guesses was 3,208. So, the wisdom of the crowd was 14% off target, but better than most individual guesses. Only four guesses were closer than the average.
We all know that the jellybeans-in-a-jar exercise is designed to show us that collective assessments are often more accurate than any individual’s assessment. In this case, we demonstrated that once again – a full 88% of the guesses were worse than the average.
But what struck me was a more fundamental question. How could the range of guesses be so wide? Everyone was looking at the same physical object – a jar of jellybeans – yet how they perceived what they saw was very different.
Is there a lesson here for financial advisors? Indeed, there are two.
We are always guessing
Most of us do not have experience estimating the number of jellybeans in a jar, so it is not surprising that our estimates vary widely. If we guessed the number of beans in a jar every day, our brains would be far better calibrated, and our guesses would improve.
But a jar of jellybeans is a static system. You can vary the size of the jar or the number of beans you put into it, but after a while our brains would account for those changes. Over time, our guesses would still improve because there are so few variables to account for.
The same is not true of the financial markets or the forces that impact their performance. These systems are highly dynamic. We love data and we can’t resist the temptation to extract patterns from that data and make observations about what is “true” based on history.
But we often fail to consider that the systems we are observing are not static. They are in a constant state of change. The things we are measuring today will not be the same in the future.
For example, since I started my career, the regulations applicable to the financial markets and the institutions administering them have changed dramatically. Commissions on stock trades are no longer fixed. Stock values are no longer measured in 1/16ths. Banks can now be in the securities business. Index funds, ETFs, and ESG funds now exist. Cryptocurrencies, private equity funds, and alternative investments have changed the investment landscape.
Investors have changed too. No one has a land line. The Internet has democratized information. Increases in computing power allow for massive and almost instantaneous data crunching. Millions of people who formerly worked in offices now work from home.
And the world itself has changed. Globalization has accelerated. Credit cards have largely eliminated the need for cash. Poverty has been reduced significantly. Life expectancy has increased greatly. Despite the headlines, the world is a far less risky place for most people.
My list only begins to capture the changes that have occurred over the last forty years. The environment in which our markets operate is fluid and is constantly being reshaped by more variables than we can possibly identify. And those markets reflect the changing aspirations, tastes, goals, fears, and preferences of the individuals and institutions who participate in them. Why would we expect the rules to remain constant?
Although our profession is built on predictions and prognostications, the evidence shows that we are no better at picking stocks or predicting the direction of the markets, interest rates, or the economy than we are at guessing the number of jellybeans in a jar.
We see reality through our own lens
Our intuition tells us that we see the world as it is – that our senses are highly sophisticated receptors designed to provide us with an objective picture of the world around us.
That is not the case. The real story is far more complex.
Our senses are designed to ensure our survival. Their goal is not to provide us with a detailed portrait of our surroundings. A model of our brains as a sophisticated camera or photocopy machine is highly inaccurate. Rather, our brains screen, filter, and amplify incoming data in a manner that allows us to act quickly and efficiently.
Our senses are bombarded with far more information than our brains can effectively process. So, our brains are selective in what data is allowed in. It manipulates that data to focus on what is important.
Our brains also constantly make predictions about our surroundings. What we perceive is as much about what we expect to see as what is actually there. One researcher referred to this as a process of “controlled hallucination.”
In addition, our perception of the world is determined to some extent by internal factors, rather than objective realities. Researchers found that physical condition, energy levels, emotions, and social identity can influence perception.
For example, they found that if you are obese or tired, distances look farther. People who are listening to melancholy music think a hill looks steeper than people listening to happy music. People who were asked to solve a math problem to verify research results were able to do so far less successfully if the research contradicted their political beliefs. Another researcher found that height, skin color, and gender influence the way we see the world.
In the end, our sensory experiences do not exist separately from our reasoning, conscious thought processes, and experiences. They are part of a unified whole. Some academics have raised the question of whether it is even possible to make observations about the physical world that are not dependent on the internal workings of the person perceiving them.
The field of behavioral finance has drawn attention to certain aspects of this issue. Researchers have identified hundreds of so-called cognitive biases or heuristics that impact our decision-making around money and finances.
But addressing these cognitive speed bumps is further complicated by a phenomenon known as “bias blind spot (BBS).” Researchers have found that people believe themselves to be less susceptible to biases than others. They can see the problem in others, but not in themselves.
Is it any wonder a diverse group of financial planners and advisors have such different views about how many jellybeans are in a jar?
What the beans are telling us
There are two lessons here for advisors. Understanding the past is important. But don’t expect history to repeat itself, especially in the short term. And be skeptical of seers whose predictions depend on the myopic study of archival minutia.
Markets are not test tubes in a science lab. They are evolving reflections of our changing world, driven by human judgements and behavioral quirks. This is not to say that they are totally chaotic, but neither are they subject to a neat set of rules that we can memorize and act upon.
When interacting with clients, how they see the world and report their observations to you are not a rendering of objective facts. Their perceptions are the product of a complex process that is highly dependent on many personal factors.
Listening to them is a good first step, but learning to interpret and understand what they tell you at a deeper level is where the art lies.
Respect their perceptions. Each of us lives on a slightly different planet. We may have much in common, but accepting our differences allows us to communicate more effectively.
Challenge your own perceptions. Periodically, ask yourself if your beliefs are based on observations about a world that no longer exists. Has the world shifted? Should you modify your own views to take these changes into account?
Also, recognize that you are not immune to the behavioral and perceptual phenomenon discussed above. Are your blind spots and behavioral quirks preventing you from doing what is in your clients’ best interests or effectively communicating with them?
Cognitive flexibility and intellectual humility are correlated with intelligence and other positive attributes.
There are more beans in the jar than you think.