Robin Powell
By Robin Powell on May 23, 2024

Five ways to think like a scientist for investment success

There is more information at our disposal than ever before. It’s available within seconds and with just a few clicks or taps on a screen. Now you may have thought that would be a positive thing, but it’s harder than ever to discern its quality, reliability and significance.

An obvious example is the growth of misinformation on social media; remember, for instance, those false claims about COVID-19 treatments, such as ingesting bleach, which quickly gained traction. We also have “deepfake” videos of politicians making statements they never made being circulated online.

These may seem like extreme examples, but they’re actually very common. Whatever subject it is you’re learning about online, there are grave risks that you’re being misled — even by organisations which appear to be reliable sources.

What, then, can you as an investor do to avoid being led astray in an age of information overload? In short, you need to develop critical thinking skills, similar to those of a scientist, that make you less gullible and help you to base any decisions you make on data, evidence and logic, rather than on impulse or emotion. 

A new book called Third Millennium Thinking by Saul Perlmutter, John Campbell and Robert MacCoun, provides a useful roadmap for learning those skills. (1) It’s not specifically about investing — the authors are a Nobel Prize-winning physicist, a philosopher and a social psychologist respectively — but the five main lessons it teaches us are extremely relevant to anyone thinking about their investment strategy and indeed financial planning in general.

1. Be naturally sceptical

The first lesson from Third Millennium Thinking is to be sceptical and to stay on your guard when consuming information. Separate facts from opinions and pay particularly close attention to who it is who’s making a particular claim. 

Remember, although there is plenty of helpful information for investors online, much of it is not helpful, and almost everyone has a commercial agenda of some sort. Most media commentators work for an organisation that has a product or service to sell. Financial media outlets are themselves conflicted in that they rely on advertising revenue from the investing industry. 

So, for instance, instead of taking an eye-catching headline at face value, ask yourself a few questions: Is this article deliberately sensationalist? Is it primarily designed to help me achieve a better investment outcome or just to attract my attention? What is the business model of the publication concerned? Who are the “experts” quoted in the article and what agenda might they have? 

2. Prioritise academic evidence

Another important takeaway from the book is that we need to assess the quality of any information we receive, and the reliability of the sources we’re consulting. 

In particular, we should seek out peer-reviewed academic research. When you come across a claim or statistic, try to find the original source. Check whether the study was published in a reputable academic journal. If it was, the findings will have been reviewed and vetted by other financial academics. Peer review isn't a foolproof system, but it does provide an important layer of scrutiny and quality control.

Ideally, you should also look for peer-reviewed evidence from multiple sources. Don't rely on a single study or expert opinion. Look for other researchers who have explored the same question, and try to understand the full range of findings and interpretations. Bear in mind as well that algorithms tend to confirm rather than challenge viewpoints to keep users engaged.

3. Accept uncertainty

Human beings are hardwired to look for certainty. That’s why investors pay attention to commentators who have strong convictions about the future and how best to position their portfolios. However the economy and the financial markets are intrinsically uncertain. Predicting the future direction of the markets is extremely difficult, especially in the short-to-medium term, and knowing exactly what to do at any one time is almost impossible.

Investors, therefore, are much better off thinking in terms of probabilities. You should be prepared for a wide range of different outcomes, both positive and negative. Remember too that the really big, once-in-a-generation events that impact the markets tend to be “black swans” — events, in other words, that come almost completely out of the blue. 

So actively seek out different perspectives and sources of information that contradict one another. Be honest about the level of uncertainty involved, and don’t be afraid to admit when you genuinely don’t know the answer. As Saul Perlmutter said in a recent interview: “Acknowledging uncertainty puts your ego in the right place… Needing to always be right is a very problematic way to approach the world.”

4. Identify your values

A fourth takeaway from Third Millennium Thinking is the importance of identifying and being guided by your personal values. At their core, values are the principles that shape our priorities and guide our actions. They're the deeply held convictions that influence how we navigate the world and make choices.

Investing is a means to an end, not an end in itself. It enables us to live the life we want to lead. So you need to think about your long-term goals and aspirations. What are the things you value most? What kind of life do you really want? What legacy would you like to leave behind?

One of the best ways to gain clarity on these sorts of issues is to engage with a financial planner — an objective third party who can challenge your self-limiting beliefs, help you work out what matters most, and then, on an ongoing basis, support you in leading an authentic and purposeful life.

5. Maintain a positive outlook

The final lesson from the book is to remain optimistic. An example of the resilience of humankind in overcoming the challenges it faces. Not so long ago, the prospect of finding cures for diseases such as cancer and HIV/ AIDS seemed a long way off. But, driven by a deep conviction that they could make a difference, scientists persevered through setbacks and failures. Their optimism fuelled their curiosity and creativity and ultimately led to life-saving treatments and innovations.

Optimism is an essential quality for an investor. Yes, they should beware of the trap of over-optimism, but if there’s one thing that financial history shows us it’s that human beings have a remarkable capacity to bounce back from adversity and find solutions for the biggest problems. Markets are bound to fall heavily from time to time, but they almost invariably recover and losing faith in human enterprise is never a good idea.

Think like a scientist

Investors today have ready access to a volume of information that our grandparents would have thought inconceivable. The danger is that it can be more of a curse than a blessing. 

The key is to think like a scientist. Stay on guard against misinformation and hone your critical thinking skills. 

No one can predict financial market movements from one year to the next. But, if you focus on your values and long-term goals, and maintain a sense of optimism, especially when things seem bleak, you are far more likely to have a successful investment journey.


Published by Robin Powell May 23, 2024
Robin Powell