27. Why Smart People Make Dumb Choices

In a survey done by the Vanguard Group, 85% of 401K participants consider themselves "unskilled investors" and would rather hire a professional to manage their account.

What about the 15% who consider themselves skilled and knowledgable? These tend to have the most education, have the highest incomes, and be higher up in the management chain. They also happen to have the lowest returns among the surveyed. How can that be?

One explanation is that smart people think they can - they should, in fact - get above average results. After all, this is what they're used to: above average intelligence, above average compensation, the corner office at work, etc. And so they try harder: they pick "winners", they sell "losers", they do their due diligence and research stocks and mutual funds, and believe that if they work hard enough they'll get above-average returns.

As we have seen, it's unlikely, or close to impossible, to consistently beat the index. The main result of all this activity is more fees, more days out of the market, more commissions paid to brokers, and, eventually, lower returns.

It's hard to let go of "being in control". It's hard to accept that average is the best we can hope for. Emotionally, intuitively, we all want to be above average, and we feel that the harder we try, the better outcome will have. We want to be in charge of our own destiny. And we believe that if we try hard enough, we will.

Take for instance your typical high-ranking executive in the corner office. Do you think they are modest enough to admit that they can't predict market movements? That they can't find the best analysts and investment tools? Of course not! They're too smart to lay their fate in the hands of the market. They'll buy, they'll sell, they'll switch course, they'll try to time the market, and, in general, a the losing game. As we saw in the past, Trade commissions alone and expensive management fees can eat a large portion of your investment over time. Add to that market timing errors, and you can see why those top brains end up with lower returns.

Unlike smart people, dumb people who follow simple dumb rules like those of Scott Adams achieve just average results - which is enough to beat the smart people. Sometimes it pays to be dumb!