Author: Matt Waldman


Jane Thayer
Thayer’s research found that investors and brokers will often discount news from a credible source if it doesn’t back their equity position in favor of an unknown analysis validating their decision. Thayer’s work earned the American Accounting Assoc

Do we outsmart ourselves? According to accounting professor Jane Thayer, it happens all the time – especially to the experts. Despite technological innovations that provide knowledge with unprecedented immediacy and scope, human beings still allow emotional biases to impact how we make decisions.

Thayer’s dissertation – “Determinants of Investors’ Information Search: Credibility and Confirmation” – won the American Accounting Association’s most prestigious award for single-authored research. Cited earlier this year in Forbes, Thayer’s research reveals that in the context of investing, more information doesn’t necessarily make a broker smarter. In fact, Thayer says that an abundance of knowledge enhances confidence but not decision-making, which can make some biases even worse.

“A lot of research shows that novices are more balanced than people who should know what they are doing,” says Thayer, who points to market bubbles throughout history. “This goes all the way back to the Tulip Mania in Amsterdam in 1637, where some tulip bulbs sold for more than 10 times the annual income of the skilled craftsman. That was the first reported example of an irrational pricing bubble. It's funny and scary that we never get better.”

What underlies Thayer’s research is the concept of cognitive dissonance. In her study, second-year MBAs believed they were particularly good at picking investments and as an example of cognitive dissonance in action, actually sacrificed credibility to validate that belief. Thayer gave the MBAs investments to choose as a long equity (picking a stock that would increase in price) or a short equity (picking a stock that would experience a decrease in price). They were also asked to estimate earnings per share. Half of the MBAs received good news about their picks and the other half got bad news. The analyst information came from three sources: good news from a reputable firm, good news from an unknown firm, and bad news from another unknown firm. Thayer then monitored the analyst information that the MBAs sought after receipt of the news.

“I was not only interested to see if they would look for the good news or the bad news depending on their position, but also the credibility,” says Thayer, who discovered that the MBAs were willing to forego news from a credible group that said they didn’t make the best choice in favor of an unknown analyst validating their decision. “The result of this behavior is lower profits or a lower payoff.”

Thayer clarifies that people do tend to make more balanced decisions with information if they are choosing between two investments because they haven’t completely sold themselves on a choice. However, once a choice is made, it is hard for people to maintain that balance when viewing additional research.

“If anything is going to make you better, it would be some type of loss that you can actually incur, but it doesn’t because you tend to justify what happened and why it was out of your control,” says Thayer, who describes the general reaction to her research as, “I can’t believe that people would behave like that!”

When Thayer was honored with the AAA Competitive Manuscript Award, she was surprised at what panelists confessed to her. “The head of the committee was a professor at Michigan who told me at the banquet that when he read my paper, he said, ‘That was me.’”