This is an interesting study on human nature and our ability to see skill when there is none. The evidence suggests that trying to pick winning stocks is as easy as trying to forecast coin tosses – and yet many, many investors pay for the right to bet on the LUCK of an “expert”.
It’s often said that people misperceive skill and luck, for example by saying that a team is on form when it has merely had a run of good fortune. A new experiment at the Autonomous University of Barcelona shows that this error is even worse than we thought.
Jordi Brandts and colleagues got a group of students to predict a sequence of five coin tosses, and then selected the best and the worst predictor. They then asked other subjects to bet on whether the best and worst predictor could predict another five coin tosses. The subjects were told that they would bet on the worst predictor from the first round, unless they paid to switch to the best predictor.
82% of subjects paid to make the switch.
But of course, there is no such thing as an ability to predict the toss of a coin. Most subjects, then, saw skill where there was only luck. And, what’s more, they were willing to spend good money to back this daft opinion.
These people weren’t just idiots plucked from the street. They were fourth year finance undergraduates at one of the best universities in Spain.