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Why Do People Pay for Useless Advice?

Good paper here on irrational behavior and the tendency to pay excessively for things due to recency biases and pure irrational thinking.  I don’t entirely agree with the premise (random walk), but it’s a thought provoking paper and should certainly be considered when structuring a portfolio that could fall into the trap of suffering from fee drag on overall performance.

“Why do humans pay for advice about the future when most future events are predominantly
random? What explains, e.g., the significant money spent in the finance industry on people
who appear to be commenting about random walks, payments for services by witchdoctors,
or some other false-expert setting?

Traditional economists attribute such behaviors to random error in decision-making.
This is the notion that an average person is disinclined to commit such errors, and that people
rationally pay for advice only if it does not seem logically counterintuitive at the time of
purchase but that is potentially useless ex post. By contrast, psychology literature assumes
that human beings are hypersensitive at detecting agency, even when none exists, to help
them to explain phenomenon that cannot be easily explained (see, e.g., Barrett, 2004). This
implies that on average people will be happy to pay for advice that is generally
counterintuitive to their objective reasoning if they believe there is an intelligent agent
making the decisions for them. Such an apparent divide between the two social-science
disciplines is scientifically unattractive.

Our paper focuses on a situation in which there is true randomness and predictions are
transparently useless. In this setting of non-existent expertise, can an average individual be
convinced to switch from having the correct belief that “outcomes are independent and
predictions are inherently useless” to the false belief that “predictions provide useful
information about the future” – thus leading them to buy subsequent predictions in the future
– if they had recently observed a streak of perfect predictions being made in front of them
live? We found that the answer is yes and that the size of the error made systematically by
people is large.”

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