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Does The Devil's Advocate Have a Role In Your Financial Decision Process?

“It’s not what you don’t know that hurts you.  It’s what you know that just ain’t so.”

                                                      - Satchell Paige


Defined by Wikipedia as follows:  Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that affirms one's prior beliefs or hypotheses. It is a type of cognitive bias and a systematic error of inductive reasoning.


While I have no knowledge or particular interest in the precise point in history that confirmation bias was formally named and recognized as a cognitive bias, there is evidence dating back to the 16th century of formal procedures intended to combat it.  During the canonization process where the leaders of the Catholic Church were reviewing a candidate for sainthood, Pope Leo X (1513-1521) was concerned that the process had become too “automatic”.  To address this concern, he assigned a priest to each candidate and the priest’s role was specifically to argue against their sainthood, to be a skeptic, and to poke holes in their candidacy.  The role of this skeptical priest came to be called none other than the devil’s advocate.  This is the true origin of a term that we are quite familiar with and a real-world example of confirmation bias being identified as potentially leading to bad results if left unchecked.


There are also current day examples that demonstrate some resilience against confirmation bias.   When you search for a product on Amazon, it’s natural to gravitate toward an item that has a 4+ star rating and is listed as an “Amazon top seller”.  In my opinion, the reviews are one of the early driving forces behind the rapid growth of the online behemoth.  Instead of having to scan through unorganized information on many cryptic websites, they curated and organized reviews and presented both a well-written positive review AND a review that was quite critical of the product.   Prior to this, many sites had developed reputations for deleting or removing negative reviews (i.e. Yelp).  In the cases where the product in question was a large ticket purchase, I always found it useful to read the highlighted critical review to see if there were any weaknesses that resonated with me before I validated the majority opinion and made the purchase.   

The role of the defense attorney in the criminal justice system is another prime example of a devil’s advocate that protects against confirmation bias and a rush to judgment.


As it relates to financial decisions, I think a good case to highlight the impacts of confirmation bias is the GE pension buyout.   This is an issue that impacts a large population (myself included) of approximately 100,000 former employees.  At the individual employee level the decision is anywhere from a few thousand dollars to several hundred thousand dollars for longer tenured employees.  While there is truly a whole spectrum of opinions here, I’ll highlight two extreme views for discussion purposes:


  1. The GE pension is guaranteed income in the future:  If you reside in this camp, you either believe strongly in the financial prospects for GE or you have a very high degree of confidence in the Pension Benefit Guaranty Corporation (PBGC), the government entity that protects pension participants in a similar way that the Federal Deposit Insurance Corporation (FDIC) protects your cash against bank failures.  Perhaps you believe in both, in which case you have 2 strong lines of defense protecting your pension in retirement.


  1. GE is headed for bankruptcy:  If you live here, you have completely lost faith in a once iconic company due to a series of negative news and events (i.e. dividend cut to $0.01, credit rating dropped from AAA to borderline junk status, a massive decline in the stock price, etc) over the past 10-15 years.  Your anxiety level is high that any time you scan your news feed, you’re likely to see more bad news about accounting errors, earnings restatements, or the massively underfunded pension liability that you’re relying on.


Confirmation bias says that if you are in group #1, you will google phrases like “GE bankruptcy extremely unlikely: don’t let them rip you off with a lowball pension buyout” or scan specifically for headlines that confirm or support your hypothesis.  At the same time, if one of your colleagues forwards an article with a headline like “GE will soon be owned by its pension liability, take the money while you can”, your instincts will lead you to immediately ignore or disregard this content without even reading the author’s arguments.  If you are in group #2, the exact opposite would be true.  


If you have an interest in the GE pension buyout, today I challenge you to acknowledge and confront your confirmation bias.  Below are two Forbes articles published in the wake of GE’s recent announcement that present two very different arguments.  The first argues strongly that in all reasonable scenarios GE will make good on their obligation, that they are offering lump sums buyouts at a huge discount to their true value, and that Congress won’t let the PBGC fail if GE were no longer around.  The second argues that GE is using extremely unattainable assumptions in order to reduce the pension liability calculations and that the actual future costs could literally be larger than the entire market value of the company.


Put on your devil’s advocate hat and read the article that argues most directly against your current view.   Don’t skim through it to get to the closing argument that ‘has to be flawed’. Try hard to give it something of an open mind and see if it alters your perspective, even if only a little bit.


Article 1:  How Much Is GE Shortchanging Pensioners Taking Lump Sums?   The argument against taking the lump sum buyout.

Article 2:  How GE Shafted Its Retirees  The argument to at least strongly consider taking the buyout.


If you’re interested in a more in-depth review of confirmation bias and its real world consequences, check out the following podcast episode produced by Charles Schwab: https://www.schwab.com/resource-center/insights/content/choiceology-episode-4


We rely on our judgment and instincts to deal with all kinds of snap decisions we have to make each day. There simply isn’t enough time (or need) to do a full-scale analysis at every fork in the road of life.  But when the stakes are high and you’re making decisions that could have long-lasting impacts, stepping back and putting your hypothesis to the test and considering an opposing view will either validate your original position and make you feel more confident or it will highlight alternate facts that force you to reconsider if not change position altogether.  

By hiring a financial planner, in effect you will have a professional who can play devil’s advocate with all of the tough questions you are facing:  rent vs buy, term vs whole life insurance, invest in the market vs pay down the mortgage, Roth vs Traditional, lump sum buyout vs keep the pension.  In some cases, your planner can introduce options that you weren’t even aware of and thus were not considering.  If it turns out that your original opinions were correct, that’s great and what you paid for was peace of mind (which can be priceless).  If you “see the light” and change direction on a particular decision, the devil’s advocate might be a small hit to your ego but a big step forward on your path to financial independence.