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Discussion On Expert Referencing

Discussion on Expert Referencing

YUEN Wai Pong Raymond


This paper discusses the research findings and theoretical points about expert referencing.

Body of Article

Research in expert referencing is very limited. One of the figureheads in this research is Professor Robert Shillers of Yale University. The leading paper is in 2001 "Bubbles, Human Judgment, and Expert Opinion" by Professor Robert Shillers. In the paper, Professor Shillers discusses investment experts are also human beings and subject to the traps of behavioral finance as other mass investors. The paper quotes the fiasco of the endowment fund of Yale University where the fund manager is subject to sharp criticism when conventional wisdom is not followed, i.e., not following the prudent man rule. The prudent man rule does not tell you what to do but just tell you to be prudent. As a result, a prudent man may be construed as someone who is regarded as prudent by the public, or be acting like the public.

Expert Referencing refers to the inclination of people to invest based on expert opinion. In other words, the investment decisions of people are based on the view or opinion of the expert in finance.

This is contrary to the assumption of modern finance theory that people are rational and independent. Listening to expert advice may lower our rational mind. Furthermore, if a group of people listen to the advice of the expert, they tend to act as a single mind instead of independence. This is also regarded as an animal spirits, another specialty of the research of Professor Robert Shillers who wrote a book on the topic known as "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism" by George A. Akerlof and Robert J. Shiller in 2009. In fact, Animal Spirits could be regarded as a name of the topic known as herd instincts or herd psychology. The main espouse is that because of social interaction and imitation, people tend to act and decide as a single mind and push something to an exorbitant extent. In finance, it is known as the bubble.

However, the research on expert referencing is very limited. However, would like to emphasize that a lot of experts are with good and superb investment skills and analytical ability. It renders just because of the herd instincts or animal spirits the performance compromised in following the expert opinion of investment decision.

Expert is defined by Wikipedia as "someone widely recognized as a reliable source of technique or skill whose faculty for judging or deciding rightly, justly, or wisely is accorded authority and status by their peers or the public in a specific well-distinguished domain." As a result, it is reasonable for people to listen to advice or opinion of experts. However, as mentioned in Section 1.2 Defining the Research Domain, expert opinion may not be right all the time and may cause the irrational and coherent behavior of people.

Expertise, according to academic categorization, is developed by a group of practice or social interaction or by an individual with prolonged hardworking practice. Expertise can also be regarded as a kind of authority or power. People tend to listen to the expert and follow the expert's advice. The expert has the power to exert influence on other people (Mieg, 2001). Some people are even fearful of the power of expert in some fields. For instance, we will seldom see ordinary people dare to fight with a black belt Taekwondo fighter cause people know that, as an amateur, they certainly will be defeated and injured in a fight with the black belt Taekwondo fighter.

About the performance of expert in investment advice, a cornerstone research on the subject was published with the summary below :

One of the recent research on expert referencing is on the performance of an expert in the finance field Jim Cramer. Jim Cramer's stock picks on "Mad Money on CNBC" was researched in the paper (Bolster, Trahan, and Venkateswaran, 2012). The research findings is a positive return for 1 days then get into a falling streak in the subsequent 29 day period. On the other hand, if Jim gives a sell signal, the stocks usually fall in the subsequent 29 days. Furthermore, according to the research, Jim cannot provide an alpha generating recommendation all in all. The research suggests that Jim may trigger the herd instinct effect in the market. The belated recommendations are further evidence with a 3.4% rally on average for the recommendation in the previous 30 days. The 1 day positive return is around 1.88% but fall into a fall with an all in all negative return of 2.1% on average.

On the other hand, the sell recommendation is usually with a 3.24% loss in previous 30 days by with further drop of 0.73% in the first day and a 2.39% drop in the next 29 days.

The accumulated return of Jim in the whole research period is -22.9% or an annualized return of -7.32%. However, Jim is performing better than the S&P with a -26.81% or annualized -8.72%).

From this research, the performance of the expert is better than the market, however, the expert advice cannot give absolute positive return during the research period.

Another recent research on the performance of individual investors following the advice of financial advisors found a contrary result (Kramer and Lensink, 2012). The performance of the individual investors improved in this case. The research is done in a European country: Dutch. The research was based on data of around 190,000 equity returns on a monthly basis for nearly 5,500 Dutch equity investors. The research finds that there a small enhancing effect on the return to individual investors. Furthermore, the advisors help to reduce the unsystematic risk of the portfolio of the investors.

Another recent research on the topic is done by Motley Fool Stock Advisor. The URL of Motley Fool is

The research was published in Dec 2012 by Molly McCluskey, John Reeves, and Ilan Moscovitz: "Can Your Edward Jones Financial Advisor Really Serve Your Best Interests?", Motley Fool Stock Advisor Website. The findings and argument of the paper from McCluskey et al are that the performance of advisors may not be very good. (McCluskey, Reeves, and Moscovitz, 2012). This a theoretical discussion paper instead of a data-research oriented research paper. However, a good deal of the points that the paper discussed are worthy to ponder upon.

For other research supporting the beneficial effects of advisors are: (List, 2003), (Feng and Seasholes, 2005), (Bhattacharya et al. ,2011), and (Kramer, 2012). However, a good number of researches find the contrary: (Hackethal, Haliassos, and Jappelli, 2011), (Bergstresser, Chalmers, and Tufano,2009), and (Zhao, 2003). In discussion of theory, some researchers hypothesize that the opaque commission structures produce a bad return on the investment (Stoughton, Wu, and Zechner, 2010) and (Inderst and Ottavianni,2009).


Bhattacharya, U., Hackethal, A., Kaesler, S., Loos, B., and Meyer, S., 2011, "Is unbiased financial advice to retail investors sufficient? Answers from a large field study." Review of Financial Studies

Bergstresser, D., Chalmers, J.M.R., and Tufano, P., 2009, "Assessing the costs and benefits of brokers in the mutual fund industry", Review of Financial Studies 22, 4129-4156.

Bolster, P. CFA, Trahan, E., Venkateswaran, A., 2012, "How Mad is Mad Money? Jim Cramer as a Stock Picker and Portfolio Manager", Journal of Investing, Vol 21, No. 2, P 27-39

Feng, L. and Seasholes, M.S., 2005, "Do investor sophistication and trading experience eliminate behavioral biases in financial markets?", Review of Finance 9, 305-351.

Hackethal, A., Haliassos, M. and Jappelli, T., 2011, "Financial advisors: A case of babysitters", Journal of Banking and Finance

Kramer, M. and Lensink, R., 2012, : The Impact of Financial Advisors on the Stock Portfolios of Retail Investors", Social Science Research Network

List, J.A., 2003, "Does market experience eliminate market anomalies?", Quarterly Journal of Economics 118, 41-71.

McCluskey, M., Reeves, J., and Moscovitz, I, 2012: "Can Your Edward Jones Financial Advisor Really Serve Your Best Interests?", Motley Fool Stock Advisor Website.

Mieg, Harald A., 2001, "The social psychology of expertise." Mahwah, NJ: Lawrence Erlbaum Associates.

Zhao, X., 2003, "The role of brokers and financial advisors behind investments into load funds", Working Paper, SSRN: