Word to the wise – Experts are especially prone to thinking they know more than they really do


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

How good is your financial knowledge? Would you say, for example, that a 15-year mortgage typically requires higher monthly payments than a 30-year one but that, generally, you pay less interest over the whole life of that mortgage? OK, in terms of classic trivia questions, it is not ‘After what sort of animal are the Canary Islands named?’ or ‘From where do Panama hats originate?’ but still – true or false? 

Well done if you answered ‘true’ – and indeed ‘dogs’ and ‘Ecuador’ – but, either way, now that we have warmed you up, take a look at the following  financial phrases and indicate, on a scale of one to 10, how familiar you are with each of them – a) Tax bracket; b) Revolving credit; c) Whole-life insurance; d) Pre-rated stocks; e) Fixed-rate deduction; f) Annualised credit. 

How did you do? If you started strongly but then tailed off in the second half, do not be too hard on yourself. Much like our two trivia questions, there was an element of misdirection – only this time with a higher purpose. For the latter three phrases are all bogus – made up by the psychologists Stav Atir, Emily Rosenzweig and David Dunning in the course of their studies into ‘self-perceived knowledge’.                                                                                                                        

Put simply, this is not what people know but what people think they know and The Value Perspective has touched on this sort of area before. In Ring of confidence , for example, we noted the well-known psychological study undertaken in Sweden in the early1980s that found more than three-quarters of participants rated themselves in the top 50% of all drivers for both skill and safety. 

Generally speaking, people know much less than they think do in a variety of situations and such behaviour is not confined to overestimating the extent of abilities such as driving. People will often claim to be aware of things they could not possibly know about for the simple reason that – as in the cases of phrases d) to f) above – they do not exist. 

This is known as ‘overclaiming’ and, in When knowledge knows no bounds, Atir and her colleagues highlight various examples, including a study where a fifth of US consumers claimed familiarity with products that did not exist. The paper also notes a correlation between self-perceived expertise and feelings of certainty when answering tough questions – though not with answering them correctly. 

What Atir and the others did was test people’s financial knowledge on three levels – whether they perceived themselves as knowledgeable about finance; whether they really were knowledgeable about finance; and whether they overclaimed. Interestingly, they found that 93% of participants claimed at least some familiarity with at least one of the three bogus financial phrases. 

More striking still were the impacts of actual knowledge and self-perceived knowledge on the extent to which people claimed familiarity with one or more of those phrases. The more people knew about finance, the more they rated the false phrases as existing but, as a factor, the more they thought they knew about finance had twice as much impact compared with their actual knowledge. 

The moral of the story is – be careful with anyone who claims any financial expertise as they may think they know more than they actually do. It is essentially irrelevant whether they do this to preserve their image in their own eyes or perhaps in other people’s – we once met a head of sales at a well-known investment bank who coached his team it looked bad if they said ‘I don’t know’ more than twice in a meeting so the third time they should lie. Just play safe and ask for their views on ‘pre-rated stocks’ …


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

Important Information:

The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.

They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.