As with the principles discussed recently, the authority principle is very useful in most of the situations we encounter. There are very good reasons why we are, from an evolutionary standpoint, programmed to follow the instructions of people in positions of authority, such as a doctor, a police officer, a professor, a business leader, etc. Without this, imagine how chaotic life would be. As author Robert Cialdini writes: “We are trained from birth that obedience to proper authority is right and disobedience is wrong,” and that is certainly for the best… up to a certain point.
Indeed, there are times when this tendency to follow the directives of authority figures causes us serious trouble or pushes us to act in ways we will likely regret later. For example, I believe the principle of authority led a significant portion of the German population to obey the orders of the Nazi regime during the Second World War. It is sometimes all too easy to justify one’s actions by claiming that we were simply following orders.
We are also likely to be influenced by symbols of prestige, such as noble titles, wealth, luxury cars, fancy watches, and so on. I suspect that many investors were drawn in by Bernie Madoff in the largest Ponzi scheme in history because they were influenced by Mr. Madoff’s prestige, wealth, celebrity client list, and lavish lifestyle.
In investing, the often-publicized opinions of “experts” can prompt many investors to make irrational decisions, especially when these experts are well-dressed (in suit and tie), seem credible, and hold impressive titles. I particularly recall the prediction of Mr. François Trahan, an economist, who warned of an “economic apocalypse in 2024” and forecasted that stock markets could lose 30% of their value. The verdict: the S&P 500 rose by 25% in 2024. Those who followed Mr. Trahan’s recommendation and sold their stocks probably regret it today.
As the author of Influence says: “Information from a recognized authority can provide us a valuable shortcut for deciding how to act in a situation.” However, he adds a little later: “Once we realize that obedience to authority is mostly rewarding, it is easy to allow ourselves the convenience of automatic obedience.”
To avoid being misled, one must ask whether a person is truly an expert in a field — what are their credentials, academic qualifications, and track record?
It is also important to ask how likely it is that this expert is being sincere or truthful. What benefit does this expert gain by expressing their opinion? Could this person profit from the rise or fall of a recommended stock or of the market?
Ultimately, the investor must do their own research before making an investment decision, rather than relying solely on the opinion of a so-called expert. As U.S. President Ronald Reagan once said: “Trust but verify” before making important decisions, in investing as in life.
Philippe Le Blanc, CFA, MBA
Chief Investment Officer at COTE 100
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