Why We Get Fooled

Patrick Brennan

IN JANUARY 1987, I was an unmarried junior Coast Guard officer just beginning the flight stage of U.S. Navy flying training. I decided to see a financial advisor who’d been recommended by friends.

This wasn’t just any advisor, but rather a retired Air Force lieutenant colonel and fighter pilot. He worked for a firm whose advisors were comprised mostly of retired military officers, and they marketed their services primarily to military officers. If there was anyone I could trust, I thought, it was this man and this firm. With a Distinguished Flying Cross on the wall awarded for combat in Vietnam—something I deeply respected—I had no doubt his recommendations would be in my best interest.

I was wrong.

His firm mainly offered two products: front-end loaded mutual funds and whole-life insurance. Because I had virtually no knowledge of these products, his sales pitch seemed sensible to me. There are, after all, certain advantages to whole-life insurance and, as he explained, the front-end loaded fees would average out, over many years, to a normal cost structure. Wasn’t I in this for the long run? Unbeknownst to me at the time, I fell for the sunk cost fallacy.

About six years later, I canceled the life insurance policy, cashed out of the mutual funds, bought a term life policy—I now had a wife and children—and began dollar-cost averaging into solid no-load stock funds. I’ve often reflected on that time not so much with regret, because it taught me a great deal, but rather wondering why I was so easily fooled. As the pandemic unfolded, I became even more curious about why so many people believed what to me was obvious misinformation—and which, in some cases, cost them their life.

In his book, Talking to Strangers, Malcolm Gladwell explains why it’s so difficult to determine who to trust. When faced with a decision regarding whether to trust another person, we often “default to truth” and presume the person is trustworthy. Why? Because it’s much more likely than not that an established “expert” is the real thing, because it would take a great deal of hard-to-find evidence to overcome any doubts to the contrary, and because it’s often unimaginable that the person would be lying.

It never occurred to me that this particular financial advisor would mislead me or sell me anything not in my best interest. I defaulted to truth. But I was lucky. Think about all the people who invested their life’s savings with Bernie Madoff. Surely this former chair of the NASDAQ and pillar of the Wall Street community could not be running a Ponzi scheme? Even the SEC, after two cursory investigations of his investment advisory business, “defaulted to truth.”

More recently, how could a floppy-haired billionaire, Sam Bankman-Fried, the erstwhile SBF, be running an alleged fraud? Several famous billionaire investors trusted SBF and were fooled. Heck, even Jim Cramer, during an appearance on CNBC, called SBF the new J.P. Morgan.

Social proof also plays a huge role in fooling ourselves. This involves following the actions of others we trust and relying on experts, because we believe they may know more than we do. Rather than do the hard work ourselves, we assume experts have it figured out and have done the appropriate due diligence, so we’re tempted to simply mimic the “smart money.”

We often forget the lesson that intelligence, by itself, does not ensure sound decision-making, whether we’re dealing with investments or many other aspects of life. Even Isaac Newton got caught up in the South Sea Bubble. Over the long term, it’s our behavior—not our intelligence—that will determine our success in so many of our life’s endeavors. I’ve learned that mistakes of omission are much less costly than mistakes of commission. At age 61, I’ll take an opportunity cost over a cash cost any day.

It’s a jungle out there, so be careful who you listen to, where you get your information, and understand the motives behind those persons or organizations who may be trying to influence you. We live in an age with few shared truths, and that’s rife with disinformation and fraud. Be patient, be skeptical, think critically and remember—when faced with doubt or ambiguity regarding some course of action—doing nothing often works out just fine.

Patrick Brennan is a retired Coast Guard officer and aviator currently residing with his wife of 34 years in Mobile, Alabama. He earned a bachelor’s degree in government studies from the U.S. Coast Guard Academy and an MBA from Spring Hill College. Besides an interest in finance, Pat enjoys traveling to visit family and friends, and especially enjoys visiting our National Parks.

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