The importance of high-quality advice lies at the retail distribution review’s (RDR) core. This concern is especially significant in the Google age, when so much in the way of supposedly wise counsel – to use the phrase very loosely – is so readily available and when quality, as a result, is vastly outweighed by sheer quantity.
This brings us, first and foremost, to the question of herd instincts, an all-too-human trait that frequently manifests itself in how we handle our finances. When rationality succumbs to intense emotions – doubt, panic, greed, fear – the extreme can quickly become the norm, even in matters of money. The run on Northern Rock represented a classic example.
This is because there is understandable comfort in conformity. If we see others act in a certain way then we tend to emulate them – even if, as often proves the case, their conduct is mistaken, imprudent or downright nonsensical. In the age of mass information, these herd instincts can be amplified all too easily.
Bear that in mind for a just moment and consider the merit of seeking anything less than expert advice on issues of genuine magnitude. Now consider, too, the findings of a recent study, carried out by the Nottingham School of Economics’ Centre for Decision Research and Experimental Economics (CeDEx), into the pros and cons of group decision-making.
A number of previous studies have sought to confirm or deny the old adage that “two heads are better than one”, with most of the evidence that has emerged to support the claim coming from experiments that have compared group decisions with individual decisions. It could be argued that in reality many significant choices are better construed as individual decisions that involve an element of consultation.
For example, we might talk to family and friends before deciding how to deal with a health problem. We might solicit all manner of non-specialist opinions before buying a car. Or we might get some advice before choosing how to invest.
These are not “eureka-type” scenarios in which a correct solution can be recognised through a formal system of reasoning. And it is in these situations that consultation may cause difficulties, as they offer a tougher test of how those with the correct knowledge can convey it to others.
To investigate this hypothesis, volunteers in CeDEx’s study were shown images of two paintings and asked to state which was by Paul Klee and which was by Wassily Kandinsky. Some subjects were placed in teams of six and invited to discuss the matter for five minutes, while others were asked to make their decision without conferring.
Individual decisions were submitted privately in both cases, with volunteers earning a cash payment for a correct answer and nothing for an incorrect answer.
In the individual setting 38 per cent of those who took part answered both questions correctly, 33 per cent answered one question correctly and 29 per cent got both answers wrong. A similar proportion got both questions right in the consultation setting – 36 per cent – but 51 per cent got both wrong, while 13 per cent submitted only one correct answer.
In short, those who took part in group discussions were far less successful overall. Why?
One especially striking feature of the results was the tendency of teammates to give the same answers. In more than 80 per cent of teams a majority of the members gave identical answers to the two questions, and in about a third all six members concurred. This happened even though participants submitted their answers individually, in private and having received no instructions that a team should reach consensus. Moreover, a post-experiment questionnaire revealed team members who reached a consensus believed communicating with others was helpful.
So it seems agreement makes us feel better but perform worse – or, to put it another way, individuals who know a little are likely to listen to a crowd that knows even less. We follow the herd – and the herd, unfortunately, is seldom well informed.
There is already a sizeable body of evidence to suggest a positive link between overconfidence and incompetence. This might explain why those who have faith in their own guesswork successfully promote it to others, resulting in groups placing their collective trust in the wrong answers.
One of the most worrying aspects of the study is that there were suitably knowledgeable people among the volunteers. The results clearly demonstrate that some subjects were familiar with the work of Mr Klee and Mr Kandinsky. Yet they were relatively unsuccessful in communicating their expertise to others. This is perturbing and goes to the very heart of the quandary of identifying the right guidance in an intensely competitive marketplace.
It is not necessary to be an economist, experimental or otherwise, to recognise the RDR has not been universally welcomed. The criticisms have been well documented and need not be revisited here. But even the concept’s most strident detractors must concede it will deserve a measure of praise if it ultimately helps ensure truly worthwhile advice is heard and valued above the uninformed din – not least when a place among the misled herd is otherwise so easily earned.
Dr Daniele Nosenzo is co-author of Does Consultation Improve Decision-Making, a study by the Nottingham School of Economics’ Centre for Decision Research and Experimental Economics (CeDEx).
