According to Wikipedia, “Belief Perseverance” (also known as ‘conceptual conservatism’) involves maintaining a belief despite new information that firmly contradicts it. Astonishingly, such firm beliefs may even be strengthened when others attempt to present evidence debunking them, a phenomenon known as the ‘backfire effect’. We’ve all seen this playout south of the border where most of the insurrectionists who stormed the Capitol Building on January 6, 2021 insist that they were ‘acting appropriately’ as ‘patriots’ who viewed the November election as having been ‘stolen’ from them.
How, exactly, might one try to offer a persuasive counter narrative to people who not only buy into conspiracy theories that are fueled by misinformation, but who are so invested in their belief that they double down when confronted with clear evidence that their beliefs are misguided?
A landmark study entitled “The Misguided Beliefs of Financial Advisors” explored this concept. It showed with extreme veracity that a large majority of MFDA registrants believed (and acted in a way that re-enforced the notion) that:
- Past performance is a reliable predictor of the future;
- Cost is unimportant regarding investment products; and
- Running concentrated portfolios (i.e., not diversifying) is perfectly okay
I started in the financial advice business in 1993 and even then, all three of those fallacies had been overwhelmingly debunked. As virtually everyone knows, prospectuses and advertisements have been saying past performance is not to be relied upon for at least 30 years, cost have been shown to be extremely relevant (John Bogle alone must have written a half dozen books about it) and diversification is broadly viewed as a critical tool for improving risk-adjusted returns, having won Harry Markowitz a Nobel Prize nearly 30 years ago.
The saying that pops to mind is “old habits die hard”. To me, that’s being too kind. I’d say that, for some people, old habits (and pre-conceived notions of how things work) persist far, far longer than they ought to because certain people are too invested in their beliefs to admit that they are wrong. Alas, financial advisors are not immune to this affliction.
