Fooled by Nice Duds and a Fancy Degree

A new study suggests that the "halo effect"judging someone positively without enough evidenceis one of three biases that can lead investors astray

Who would you rather have as an investment adviser—a suited man with a Cornell University degree or one in chinos and a T-shirt who went to a no-name college? A study by Princeton University assistant professor Emily Pronin asked subjects to view photos of the same man in two types of garb, with the different IDs. Subjects then estimated how much of a hypothetical $1,000 they'd invest with each. The suited man got an average $535 without having his background checked; only $352 went to the casual dresser, whose credentials they were more likely to check. The study suggests that this "halo effect"—judging someone positively without enough evidence—is one of three biases that can lead investors astray. The others: "overconfidence" in financial prospects for retirement and making uninformed snap investment decisions. To mitigate the first, check broker backgrounds at finra.org, site of the Financial Industry Regulatory Authority, whose foundation funded the study.

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