We live in a world of proliferating choice. A search for “men’s socks” on Amazon.com yielded over 80,000 results. 80,000+! Did anyone reading this ever anticipate having to choose between tens of thousands of options for socks, let alone anything else? I certainly did not.
This sparked my curiosity about a variety of other everyday items one might need:
- “hammers” = 4,000+
- “dog bed” = 10,000+
- “mixing bowls” = 1,000+
With this many options across so many goods and services, it’s impossible to make truly informed decisions everytime you need to spend money. This has opened a niche for individuals and organizations to add value through curation. Curation is the act of sourcing, sifting through, organizing and ultimately selecting goods and services on behalf of others.
Curation is a form of outsourced decision making for consumers. It’s a reliance on a third party to decide what options are made available to you. Drudgereport.com curates the news available on the internet. Your local artisanal grocery store curates the universe of food and beverage for its customers. Investment advisors curate the thousands of investment options available today into what results in a portfolio.
Curation is great in the sense that it can filter down the amount of choice in your life. This, according to the Paradox of Choice, has a positive psychological benefit. However, there are some pitfalls to curation to explore.
The curator’s incentives
Your local specialty grocery store selects what ends up on their shelves based on taste preferences for the most part. If there is overlap in taste preferences you are likely to be a repeat customer. There aren’t many misaligned incentives to watch out for.
In the case of news, some additional critical thinking is warranted. By and large, media companies make money from advertising revenue. Ad revenue is increased when more people view your content. For television channels, higher ratings equate to higher advertising dollars. For websites like drudge, its all about page views. So, the incentive built into the system is to get eyeballs on your content.
How do you get more people to consume your content? It’s not by reporting on what’s most important for people to know about. It’s done by reporting on what’s most likely to catch people’s attention. What’s most likely to catch people’s attention? Topics that take advantage of our natural biases. Topics that exploit people’s fears and deep seeded desires to know what the future holds. Anything with a dramatic or entertaining story. In a nutshell, a lot of content is deliberately designed to get you to pay attention to it, not solely for its informational value.
Take CNBC for example. This station reports on the global economy and financial markets all day long. They interview experts with great communication skills who tell complicated narratives and they do it with conviction. This plays on your desire to feel like you know what the future holds for your portfolio. It leverages the cognitive errors we all have described by the halo effect and the fact that we associate conviction with accuracy in the realm of forecasting.
The facts are that those people invited to be on CNBC are there to produce ratings, not because of a quantified track record of forecasting success.
The curator’s beliefs
Misaligned incentives in the financial advice business have been continually reduced over the years through regulation. That being said, anyone reading this should still fully understand how their advisor gets paid. Incentives are a powerful force and should not be underestimated. But there are other considerations to make.
There are multiple ways to compound your wealth in financial assets over the long term. There is no universal “best” strategy that works 100% of the time. But there is a “best” strategy for every investor out there and that’s the strategy you are most likely to stick with through thick and thin.
When you hire someone for discretionary investment advice you are 100% outsourcing your decision making. You are less knowledgeable about investing and have hired someone to make those decisions for you. In order to achieve returns that meet your long-term objectives, you have to be able to stick with the advisor. This means through good returns (easy) and ones that scare you (very difficult). This is why it’s imperative you believe in the advisor’s decision-making process.
You have to understand and agree with how they make investment decisions. This starts with understanding the beliefs that inform their decision making. Beliefs are a powerful predictor of how a person makes decisions. They are the filter through which we process information and ultimately decide.
What do they believe will lead to success in managing wealth? If the principles articulated make sense and you believe they will work over the long term, then you may have a match.
The ultimate question
The problem with the prescription above is, since you are at a knowledge disadvantage, you still may not be able to judge the quality of the beliefs. Maybe it’s just a good sales pitch.
But there’s a way to test the quality of those beliefs. Ask “Why?”.
Asking someone to explain why not only increases your understanding of the topic, it also helps you understand how fluent they are in the topic. It tells you how much work has gone into forming those beliefs. The more work that’s gone into forming those beliefs, the more likely they are intrinsically motivated. The more intrinsically motivated your curator is the more likely they apply a craftsman mindset. Those with a craftsman mindset are much more likely to continually improve over time, enhancing the benefit to the consumer.
How one thinks
If the trend of abundance is to continue then the need for curation should increase. As the 1978 Nobel Prize winner put it:
“What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.” -Herbert Simon
There’s no way to make fully informed decisions on everything. We don’t have the time or cognitive ability. This makes curators a valuable resource. But there are pitfalls to the outsourcing of decision making. A better understanding of a curator’s incentives and beliefs will mitigate these risks. You want to align with people who are in it for the right reasons. You also want more predictability over less.
Simply put, it comes down to understanding “how” one thinks as opposed to “what” one thinks. The ability to decipher “how” a person thinks will only increase in importance as information and choice proliferate. That is a big part of what this blog is all about.