Certainty addiction in financial decision-making

In my short time in this forum, I’ve noticed that we spend considerable time discussing both commendable and questionable decisions—our own and others’. Exploring these decisions humbly and methodically can be quite helpful. Models of behavior are one of the fundamental ways we learn ethics and good decision-making, and I’ve certainly gained wisdom from the stories many of you have shared.

This past Tuesday, while driving to CrossFit, I listened to a stimulating conversation on “The Rational Reminder Podcast” with Ted Cadsby, a former executive at CIBC, a Canadian financial firm (Episode 382). The podcast began with a discussion of the power of index fund investing but then shifted toward human nature and how our evolutionary development has created “design flaws” that affect our lives and investment decisions. What worked so well for us when we roamed the savannah doesn’t serve us as well in modern life.

While Cadsby works in finance, he majored in philosophy and has spent considerable time explaining how insights from the field of human cognition relate to finance and investing. (As a lifelong advocate of the liberal arts, I’m particularly drawn to stories of humanities majors who apply their insights to fields that, at first glance, seem far removed from the humanities.)

In this podcast and in his book, “Hard to be Human,”Cadsby identifies five cognitive “design flaws” that, while sometimes helpful, also lead us to make errors in logical analysis:

1. Greedy reductionism – our tendency to oversimplify complex ideas and systems
2. Certainty addiction – our tendency to crave the feeling of “knowing something” even when we’re wrong
3. Emotional hostage-taking – our tendency to overreact emotionally and then ruminate obsessively over issues
4. Competing selves – our tendency to collapse our competing identities into one unified self
5. Misguided search for meaning – our tendency to overestimate the belief that we have inherent meaning and purpose in life

Certainty Addiction in Focus

Let’s review one of these design flaws more closely.

Certainty addiction is the tendency to derive more pleasure from the feeling of “knowing” something in a conversation or argument than from actually checking our facts or entertaining the possibility that we might be wrong (which does not feel so great). Our pleasure comes not from actually knowing or understanding something, but from the belief that we know or understand it.

While certainty addiction may serve us well when confronted by a rattlesnake in the forest, it’s less helpful in determining how best to invest in the stock and bond markets. I suppose this is why indexing is so powerful—you don’t have to know precisely where stock value is headed because you’ve bought the whole sector or market.

That said, I’ve met so many advisors who “know” how to best invest, and they all offer different, even contradictory advice. I now see that they’re rewarded emotionally for “knowing,” despite the fact that they don’t really know. In that feedback loop, they become addicted to the certainty of their own advice.  (Having taught in academia for most of my career, I would say we academics are quite prone to certaintly addiction.)

This raises important questions: How can we recognize certainty addiction in others? Perhaps more importantly, how can we best avoid certainty addiction in ourselves when it comes to financial decisions?