Navigating The Authority Problem: Smart Capital Investments

Blind trust can be dangerous – especially when it involves trusting others with your hard earned paycheque. Even at your local investment firm, it is easy to trust the figure of authority sitting across from you (the investment advisor) and assume that they are just as knowledgeable and skilled as they appear to be. A modern office filled with finance books, a fancy well-fitted suit and shiny shoes contribute to the idea that the investment firm and the advisor have your best interests in mind – and that they take investing your money in smart capital as seriously as you do.

However there is a problem here – the problem of misplaced trust. As demonstrated in the Milgram Experiment, the average person will follow the instructions of an authority figure even if those instructions directly contradict what that person is normally willing to do. Also, we often categorize someone as a person of authority without giving much thought as to why the person should be considered an authority figure at all. In terms of making smart capital investments, this can be devastating; as taking the advice of someone that doesn’t have your best interests at heart is nearly the same as blindly investing at random.

In one of his Mill Street PerspectivesNoah Murad, the CEO of Mill Street & Co., writes that the desire for an authority figure during investment decisions comes out of our human desire for psychological security. In other words, the desirable image of success that the authority figure portrays (or in this case a flashy executive at your local investment firm) is likely what provides your confidence in their authority. In a very simple sense, this can be boiled down to a feeling. A feeling of success and financial security that we feel is bound to occur by heeding their investment advice. After all – their firm has achieved success, so why shouldn’t we be the same?

This feeling not only happens because of a desire for security, but also because it is easier for us to simply assume that our investment advisor is qualified and that the advice they give is well founded. (Instead of basing our judgement on their experience, education, aptitude, and other relevant factors). Also, when your family, friends, and peers all state how amazing a certain advisor or firm is, you have been presented with even more ‘evidence’ that makes it easy for you to mistakenly assume that their advice is in your best interest .

In fact, if you were to pick the brains of several different families in Toronto, it is likely that the majority of them will say that they chose their investment advisor / lawyer / insurance broker etc. based on them being “hard working and/or a good group of people”. While this may be true, these families are investing based on an illusion of authority in an effort to feel secure and comfortable. Although a bit more legwork and critical thinking may be required to find the right investment firm, it is much more comforting to know that your advisor stands to lose when you lose (and win when you win), as your interests are aligned. In this sense, trust can be more confidently given to your investment firm, and smart capital investments become easier to make without becoming blinded by the illusion of authority.

So, the next time you are looking for advice from an investment firm, it is important that you not only ask yourself “does my advisor stand to lose if I lose?” but also “why should I consider my advisor a figure of authority?”. By asking yourself these two questions, you are judging an investment firm based on rational thought, and avoiding the illusion of authority that can cause you to invest on a superficial whim (i.e. choosing the investment firm with the nicest offices etc.).

If you would like to learn more about the authority problem and how it comes into play with smart capital investments, the CEO of Mill Street & Co., Noah Murad, has written in depth on this topic in his Perspectives piece: Blind Trust & the Expert’s View. For more information and strategies regarding smart capital investments, modern business management, and choosing the right investment firm, visit the Mill Street & Co. website. It includes an online knowledge base, which is a terrific resource for anyone looking for more information regarding risk management, financial planning for the future, and making effective investments.

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