What is Authority Bias?
As per Wikipedia, Authority bias is the tendency to attribute greater accuracy to the opinion of an authority figure (unrelated to its content) and be more influenced by that opinion.
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This is a very common cognitive bias. It’s a mental shortcut to conserve our brain energy. We tend to blindly believe in what an Authority says and don’t bother to check the facts.
As human beings, we have evolved over millions of years as a herd, led by a leader. The leader alone made the big decisions and the rest followed him.
As a result, we have a deeply rooted sense of duty to follow Authority. In the age-old days, kings, queens & ministers played the role of authority. But nowadays politicians/businessmen/professionals/ Social Media Influencers fit in the role of authorities.
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In age-old days, as the authorities had superior information and knowledge, it made sense to follow them blindly. But in today’s digital age, nearly every person has access to a vast amount of information along with education to make decisions for themselves. So to follow the authorities blindly can be harmful.
Authority bias can’t be explained without the Milgram Experiment. Here is the link for a short 5 Minute video on the same.
https://www.youtube.com/embed/vuMt8b4UrcI
Basically in Authority Bias, the SYETEM-1 comes into play and the detailed thinking and analysing by SYSTEM -2 are bypassed.
In investing, such authorities can come from many places. They may be business news anchors, celebrity MF managers, big analysts and now even YouTube / Instagram / Twitter Influencers.
Of course, you have to be very careful while following their advice as we don’t know their INCENTIVES. It may be some simple prediction or some ‘ Pump & Dump’ strategy also.
A countless number of people have lost a major chunk of their investment by following the advice of people they consider an authority on the subject.
One other classical example of Authority Bias is, after the COVID times, when there was an ample amount of liquidity in the system, all the cryptocurrencies started shooting up. And during that time few Bollywood celebrities and a few YouTube influencers had done advertising about those cryptocurrencies.
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And many followers of these authorities did invest in cryptos only to lose their capital in the coming months. Here the authorities had different incentives for doing those advertisements. But their followers didn’t realise it and lost their hard-earned capital.
Authority bias can be damaging because it limits the individual’s decision-making, which is bad when the leader is wrong, or when the leader’s ideas are misunderstood.
In investing, this authority bias may push you to invest in businesses that are out of your circle of competence. So you will invest with borrowed conviction and may get confused if the investment starts going down. And in such cases, the worst thing can be Loss Aversion and if you average your investment down, you fall prey to the Suck Cost Fallacy.
So How to overcome authority bias?
Compared to the other cognitive biases, the authority bias is easier to overcome.
1. Think logically
Whenever you have to follow any instruction, think with an open mind if you are doing the right thing.
One very simple logic I want to put forward here about all the predictions. We have seen many analysts and company management predicting their future sales / EPS.
Here I want you to do a simple exercise. Suppose you are going out for the job in the morning and have a certain amount in your wallet. Now can you surely predict how much cash will be there in your wallet when you come back at night? It’s so difficult to predict our daily cash flows. So how can these analysts/managers be able to predict such numbers with so much confidence?
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So, When it comes to predictions, they are the most UNPREDICTABLE.
So don’t believe in all these predictions blindly.
2. Assume the same recommendation to come from a person of lower authority
When Usain Bolt drinks a chilled Coca-Cola after a sweaty run, you feel like drinking one too. If your neighbour did the same after his morning run, would you feel the same? I don’t think so.
When you picture a common man recommending you a product or an action, you question the action and think straight.
Same way don’t believe in any stock recommendation / any management commentary/analyst predictions blindly. Think as if your friend/colleague is suggesting the same. Will you act on it?
And when it comes to direct stock investing, nothing can be as important as Check-List.
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YOUR CHECK-LIST is one of the BEST weapons against all these biases. It will convert your SYSTEM 1 intuition to SYSTEM 2 analysis.
So PLEASE do take some special efforts and make one for your own. And most importantly follow it.
Hope you found this write-up on Authority Bias useful.
Regards,
dr.vikas
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