What's up, guys? So, you can be super intelligent but still make the dumbest money decisions possible. In fact, some of the smartest people I know, they make bad money decisions.
One of my smart engineering friends, for example, messaged me the other day asking if he should throw $1,000 on a call option expiring in 24 hours and also confided in me that he has less than $2,000 saved for retirement. And he's 32, by the way. So, I started to wonder, how can someone so smart be so dumb with their money?
Well, I decided to dive deeper and I've discovered that there are three common cognitive biases that we are all susceptible to and smarter people often fall victim to these because their intelligence is actually working against them in these specific situations. The first bias is what's known as authority bias. So, this is where people have a tendency to trust the opinion of an authority figure and ultimately be influenced by that opinion regardless of if that opinion has merit or not.
And we see this type of bias every single day in the financial markets. It's easy to assign trust to someone who has a big influence. Like back late last year in 2024, quantum computing became a sector that received a lot of buzz after Google revealed its latest Willow chip.
From the Google blog, quote, "Willow performed a standard benchmark computation in under 5 minutes. That would take one of today's fastest supercomputers, that is 10illion years. That's 10 to the 25th power.
" That's a number that vastly exceeds the age of the universe. Essentially, people back in December thought that these quantum chips would change the world as we know it. Companies like Regetti Computing, OQ, and Quantum Computing were all stocks that received a huge boost to their stock price on this speculation after the announcement.
In fact, just looking at these stock charts, you can just see the massive explosion in their growth. Regetti was literally trading for$1 to $2 for a long period of time and then boom, within a few months, it was up over a,000% and there are similar stories with the other two stocks as well. But just one month later after these stock price surges, Nvidia's CEO Jensen Hang took the stage at an Nvidia investor conference.
And during his speech, he declared that quantum computing was still quote 15 to 30 years away. The result was that companies like Regetti Computing, INQ, and Quantum Computing sunk as much as 30% in the pre-market and actual trading the next day, and they haven't recovered since. Now, this is just an example of authority bias within this specific sector.
These stock prices reflected the sentiment of Jensen Huang's authority on quantum computing. And since Jensen Hang has a ton of authority on the AI and computing space, the market may have been swayed by his bias. The truth is that many people probably didn't do any due diligence when it came to these stocks and they probably bought them on a speculative future after the Willow announcement and then they sold them on a whim after a negative comment.
What's most telling about this example is that despite the huge volatility with these stock prices, the underlying businesses of Regetti, Quantum Computing, and OQ likely stayed the same during this period. It's not like these companies suddenly advance their technology a thousandfold after Google's announcement. Uh nor did their road maps or research suddenly become worthless after Jensen's comments.
The truth is is that we don't really know whether or not these companies will succeed. And I'm personally bearish on quantum computing just becoming an actual thing anytime soon, but this example just kind of shows you that many people just fall victim to authority bias in this case. This is just one specific example, but there are also many examples in the past year or so where notable figures might tell you to buy certain assets without any merit.
For example, Eric Trump, which is the son of Donald Trump, said that it was a great time to buy Ethereum in this tweet. Ethereum, on the other hand, is now down over 45% since this was tweeted. When you are smart, you tend to assign too much value to other people who are smart and that seems rather logical.
Your brain is taking an efficient route to get to the solution. Except in the case of investing and buying stocks, it may not be the right move. So to avoid authority bias, I have a few tips for you.
Number one, we want to practice authority blindfolding. That's simply where you just try to remove the name or title from whoever is giving the advice. So now all of a sudden, pretend that it was your neighbor saying the same thing or someone that has no credentials talking about the topic.
That way, you're going to be way more objective about the information that you're getting. The second is to look for alternative viewpoints. There usually is a case for the complete opposite opinion of the one you are currently considering.
Make it a practice to find at least two opposing opinions. And this will create that cognitive friction that you need to avoid authority bias. And number three, learn to trust yourself and your own judgment.
And this will allow you to constantly question whether or not anyone else's opinion actually aligns with your strategy. Now, another great way to get some authority is to actually subscribe to my free newsletter called Humpdays. That's where we come out with two free business newsletters twice per week on Wednesdays and Sundays.
And it's free to sign up. I've been running it for about 3 years now, and we have over 69,000 subscribers. The link to sign up will be down below in the description.
And if you really enjoy our videos on YouTube, you will probably enjoy reading that newsletter. The next bias that plagues everyone, but especially smart people, is something called confirmation bias. This is our natural tendency to seek out information that confirms our pre-existing beliefs, and we tend to ignore contradictory evidence or information.
Smart people will use confirmation bias to defend their dumb money decisions all the time. And it's especially dangerous for those that are super logical because if you're a super methodical thinker, you can actually build a logical sounding argument to defend your pre-existing opinion. So, here's an example.
Let's pretend you are super bullish on tech stocks and AI. What happens next is that you'll probably start noticing all the news articles about tech companies crushing their earnings reports. You'll remember the friend who made a ton of money on Apple stock, but conveniently forget about the one who lost everything on a tech startup.
You'll probably join forums and follow influencers who share your bullish tech outlook. And you might create an echo chamber that reinforces your existing beliefs. And this is the problem with social media these days, especially Twitter or X.
In my opinion, the algorithm will know that if you like a specific topic based on how long you stop on the timeline reading that said topic. And so what does the algorithm do? It does what it does best, which is it feeds you more of that information.
A University of Texas study looked at how people behave on stock trading forums online, and they found that 85% of investors preferred to read posts that agreed with what they already thought about a stock. When someone strongly believed that a stock was worth buying, about 78% of them clicked on messages supporting that view. Similarly, when someone thought selling was the right move, about 60% clicked on messages backing that point of view.
Most interesting of all, investors claimed that the posts agreeing with them were more popular, better supported by facts, and had stronger arguments even when that wasn't actually true. This kind of just shows you how our brains naturally filter information to what we already believe. So, how can you avoid confirmation bias?
The first is to ask yourself why five times. So I actually use this practice a lot in my personal life to drill down into the exact reason I'm doing anything. But if you ask yourself why five times, you will learn a lot about yourself.
So for example, let's do this practice with Apple stock. Let's say you want to invest in Apple stock. You might ask yourself the first question.
Number one, why do I want to invest in Apple stock? And you might reply, oh because it's the biggest company in the world. Then number two, why is it the biggest company in the world?
And your response might be, well, because they make the most ubiquitous devices and services in the world. The iPhone and the Apple ecosystem aren't going anywhere. Why number three is basically, well, why does that matter?
Because it means that they have a strong moat. It's hard to displace Apple as the primary phone carrier in the United States in a lot of the world. Then you might ask yourself, well, why is it important to have a strong moat?
And you might answer, well, because it protects profits and ensures strong cash flow into the future. Then you might ask yourself the fifth why, which is like, why am I focused on profits and strong cash flow rather than growth? And you can see here that by the fifth why, you often figure out something surprising about your true assumptions and motivations.
Often times asking yourself why five times about anything will get you at least below the surface level thoughts you might have and helps you avoid confirmation bias. Another useful way to avoid confirmation bias is to simply keep a journal of decisions. Whenever you are making a decision about money, document it.
Just write down a few lines. You can document the decision itself, the reasons for making that decision, your expectation of that decision, and then follow up at certain intervals of time to refine your thinking. So, for example, if you're making a stock investment on say May 1st, 2025, you can quickly write down all the reasons you made that purchase.
Then you can check back in 30, 90, 180, or 365 days and see if your thought process at the time held up. You want to get your expectations as close to what actually plays out in real life. And this is a simple way to avoid confirmation bias in almost any subject.
All right, bias number three today is what's called overconfidence bias. This is arguably the most dangerous cognitive bias for smart people. And that's basically when people overestimate their knowledge, abilities, and their predictions.
The problem becomes because you are so smart, the more susceptible you become to this bias. And this is due to domain specific knowledge. That's when you've succeeded in other domains like engineering, medicine, or law.
Your brain naturally assumes that these skills will translate to money or investing. But the truth is is that that's not exactly the case and it's never exactly onetoone. Overconfidence can show up many ways with money, including number one, ignoring risk.
Some people think because they are so good at other domains, they'll actually end up underestimating the probability of something bad happening with their money. That's why so many smart people lost money in the. com bubble, the 2008 financial crisis, or 2022 crypto collapse.
Each time, smart people usually try to convince themselves that, quote, "This time is different," or that they have an edge over other people when, in fact, the opposite is true. Another way overconfidence can show up is just simply under diversification. Smart people might look at Warren Buffett's portfolio, realizes that he concentrates heavily into a few stocks, and they'll just try to achieve the same results by following his strategy.
Under diversification can also be dangerous if you work at a company that gives you stock. So for example, let's say you work at Apple. Because you are immersed in the world of Apple and the company itself, you may be irrationally bullish on that company.
Many people that work at these tech companies will often have 80% or 100% of their net worth in that company's stock. And that's fine and dandy when things are going well. But if the tech sector or that company in particular underperforms, then you could just lose a lot of money than if you were just properly diversified.
An example of overconfidence in the real world from about 25 years ago is the story of this one financial firm called Long-Term Capital Management. It was a hedge fund ran by Nobel Prize winners in economics back in 1998. They traded on complex mathematical models that were designed to outperform the market with huge leverage.
According to their Wikipedia page, LTCM was initially successful with annualized returns after fees of around 21% in its first year, 43% in its second year, and 41% in its third year. However, in 1998, it lost $4. 6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and the 1998 Russian financial crisis.
So, LTCM was a firm founded by super smart people. They had Nobel Prize winners, but they were probably overconfident on their models and thus they collapse. So, how do we as normal people or even smart people try to combat overconfidence bias?
The first thing that you can do is to respect the fact that you can get lucky. Whenever you have success in investments, it's easy to say that you deserved it for making, let's say, an incredible call, but you really want to look at it objectively and see how much of your success was due to factors beyond your control. And you can do this by step number two, which is tracking your predictions and seeing how they turn out.
Much like our journal of decisions in the second bias that we talked about today, if you write down your investment predictions and follow up with how they actually do, you will be able to calibrate for success later on. And another easy way to combat overconfidence bias is to just keep your investing and money options simple. That's why I think index funds are by far the most recommended investment product out there.
It's because they are very simple and they keep it foolproof. As soon as you start creating complex justifications for investment decisions, that may be a sign that you are getting overconfident. The irony is that truly smart investing often looks really boring and it's not about finding the next big thing or outsmarting the market.
It's about consistently applying sound principles and acknowledging the limits of your own knowledge. Smart people can be dumb with their money because usually they just fall victim to their own intelligence. But the thing is, money doesn't really care how smart you are.
It just wants you to make the best decisions over time. By watching this video, you are now hopefully aware of these biases. And that should put you ahead of most of the population when it comes to investing and money decisions.
My personal favorite method of today's video is to ask yourself why five times for money investing, even personal decisions, and it will just help you become a lot more introspective. All right, make sure to subscribe to this channel if you haven't already. And if you enjoy this video, you will love this video right here.
It's titled Why People with the Same Income End up rich or broke. It's a video where we dive into the different habits of financially successful people that can make the difference between true wealth or just a life of being average. I will hopefully see you in that video or a future one on the channel.
Thank you for being here. All right, peace.
