“As we know, there are known things; there are things we know that we know. We also know that there are known unknowns; that is, we know that there are some things we do not know. But there are also unknown unknowns – the things we do not know that we do not know.”
US Secretary of Defense Donald Rumsfeld during a Pentagon Briefing
We assume that skilled experts know lots of their fields, be it national security, investment, medicine, or other areas. But as Rumsfeld’s commentary highlights, “meta-knowledge”—awareness of the bounds of 1’s knowledge—is just as necessary as knowing what one knows.
Do skilled experts have a bonus over non-experts because they’ve the next level of meta-knowledge? latest study attempted to reply this query by conducting research with experts in climate science, psychological statistics, and investing.
The researchers concluded that experts tended to have higher meta-knowledge than laypeople. They were less confident overall, but were more convinced of their correct answers than laypeople. However, experts also tended to indicate greater confidence of their incorrect answers than laypeople.
Previous studies have found cognitive biases amongst financial and medical examiners. For example: Economists show overconfidence of their theories despite an extended history of incorrect forecasts. Although they typically extol the importance of decision evaluation, in practice investment professionals often fail to accomplish that. Yet a lot of them remain firmly convinced of their suboptimal conclusions.
Unfortunately, years of experience don’t appear to mitigate these tendencies. Medical professionals have shown similar patterns. One study found that physicians’ confidence in a diagnosis remained at 70% even once they appropriately diagnosed difficult cases only 5.8% of the time. Just as misjudgments can harm a patient, suboptimal decision evaluation can hurt a client’s investment return.
Given the longevity of certain cognitive biases, the query is how advisors can de-risk their decision-making by expanding their meta-knowledge. One method to do that is to leverage individual investment talents in a structured team environment, giving the firm a competitive advantage.
Organizational advantage depends not only on the sum of individual talents, but additionally on how those talents are structured, integrated and utilized. A well-designed organization optimizes team dynamics, promotes effective communication, and fosters a culture that supports decision-making that’s aligned with strategic goals. The right environments and processes can amplify individual skills which are as necessary to success as market strategies.
Bigger isn’t at all times higher in relation to investment teams. A big research investment team doesn’t guarantee good decisions or sound judgment. In fact, it might probably make the investment process unnecessarily complex and inefficient. Flatter organizations are likely to perform higher. This could also be attributable to simpler structures.
Leveraging the insights of research analysts and portfolio managers is the sign of competent leadership and a supportive environment. Teams with different education, experience, skills and knowledge can add value to an organization through shared goals and open communication.
Key finding
Trust is a mandatory but not sufficient factor for long-term investment success. Increasing the meta-knowledge quotient of the investment team may help protect against the surprises that lurk in events on the lower end of the dimensions and remain unknown until they’re known.
