Smart people do dumb stuff on Wall Street all the time. In the introduction to the Abnormal Returns book I write:

It never ceases to amaze me how even the most sophisticated investors can so often get caught with their proverbial pants down. For any number of reasons, sophisticated investors, make fundamental mistakes, often out of overconfidence, that belie their high status.

Part of this has to do with our inability to note our own biases, even when we are able to spot them in other people. Robert Seawright at Above the Market writes:

Our overarching problem is called the bias blind-spot, our inability to recognize that we suffer from the same cognitive distortions that plague other people. In other words, we can see that these biases are a big problem generally, just not for us. We’re especially good at spotting and pointing out the flaws of people we know. This common failing is well illustrated by some recent research.

The challenge is not for most investors in coming up with a workable investment strategy, but in trying to implement that strategy on an ongoing basis. The problem arises that is always a plausible reason NOT to do something our strategy is telling us to do. It may be some brick in the “wall of worry” or something else entirely. Either way the smarter someone is the more plausible a story that can come up with telling them their system is incorrect.

Gatis Roze writing at the StockCharts.com note the difficulty some professionals have when they come to the stock market. Their desire to know ‘why’ often is at conflict with the ‘what of the market. He writes:

Highly educated people must learn to overcome their need to know the cause of things.  Instead, they must learn to focus on clearly understanding what is happening and then having the discipline and risk management skills to act decisively. Retail traders and recreational investors alike must embrace and trade the actual market they are given, not the market they hoped for or the one they believe they are about to figure out.

Nobody has yet to figure out the markets. This despite the fact that an army of forecasters awaits telling you they have done just that. That being said, it would be silly to say that education has no bearing on outcomes in the financial markets. Indeed there is some evidence that higher IQs are related to better market outcomes.  However if anyone thinks they can simply ignore their biases and/or out-think the markets then they are in for a nasty surprise.

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