By Karen Firestone
WE’RE surrounded by people (and companies) exaggerating their skills or knowledge or products—and we’re often guilty of it ourselves. This behavior is called “overclaiming.”
I recently encountered an illustrative example. After a hedge fund had a horrendous quarter, the managers wrote to clients, saying that they had decided to concentrate 70 percent of the entire fund in only five stocks. The managers explained that a plunge in prices provided them a rare opportunity to temporarily increase concentration in their strongest areas, which they were sure would soon increase sharply in value.
The managers wanted to regain their losses and the trust of their clients. But their action was similar to poker players doubling down on what they believe to be a good hand: They think they have exceptional cards, or in this case, stocks. A hand of four aces is always a winner, but it’s a hand that no one playing the market legally can claim to have.
Overclaiming occurs everywhere: a biotech CEO saying that the company’s tests can determine various diseases from a single drop of blood; a marketing executive insisting that she can double her sales from last quarter; a football coach telling his players that they can easily beat their opponents.
What matters is being able to differentiate between bold claims that may be true and those that are pure hype. We may have learned to tune out the marketing and advertising claims we’re constantly bombarded with, but we need to extend that skepticism to overclaimers whom we’re inclined to trust.
To avoid making poor choices as a result of overclaiming, be skeptical if:
- What you’ve been told sounds too good to be true.
- You feel the person is trying to intimidate you into not asking questions.
- You ask a few questions, but the person can’t address them or you don’t understand the answers.
Only when you are comfortable and confident with all the information you’ve received should you make a decision.
Karen Firestone is the president and CEO of Aureus Asset Management.