Set forth below is the text of an answer that I posted to the Quora site to the question “Why do so many people trust stock analysts, investment banks or big audit firms when their conflicts of interest are obvious and they’re involved in fruad scandals all the time?”:
1) Even the worst of these people mix in lots of true stuff with the false stuff and people are fooled by the true stuff into thinking they are dealing straight with them;
2) The best of these people (a not small number — there are many good and smart people working in this field) offer truly wonderful advice without charge and properly inspire confidence in the entire industry by doing so.
3) People are intimidated by investing. They believe they cannot possibly understand it (they are wrong, but this is what many believe). So they feel they have no choice but to place their trust in “experts”;
4) The stuff that these people say that is most dangerous is generally stuff that appeals to our Get RIch Quick impulse (we all have one). Our emotions override the voice of common sense telling us to be wary;
5) We are still in the early days of our discovery of what really works in stock investing. So there is no one who today can with a high level of confidence offer truly sound advice. So long as that remains the case, the stuff that the bad guys put out will sound at least plausible;
6) Stock market prices correct only over long periods of time. Stocks have been dangerous since early 1996. But the market performed amazingly well in 1996, 1997, 1998 and 1999. People who stuck with high stock allocations at a time when that was a very bad idea received lots of short-term positive feedback for doing so;
7) The checks and balances that help us in many other areas of life endeavor do not work well in this area. In politics, we count on the Democrats to tell us when the Republicans are playing games and on the Republicans to tell us when the Democrats are playing games. In stock investing, there is no other side. Bull markets last for years and during those years everybody profits from pretending that the bull market gains are real. So we hear all one side of the story for many years and then all the other side of the story for many years (after the bull becomes a bear);
8) Journalists don’t do a good job in this area. Journalists who cover politics are skeptical. Journalists who cover investing are intimidated by the subject (journalists tend not to be good with numbers). So they become excessively indebted to their “sources”:
9) Academics don’t do a good job in this area. I have spoken to numerous academics who have told me that they don’t have confidence in the conventional investing advice but that they are too afraid of what would happen to their careers to be willing to speak out or to do “controversial” research. Bull markets create so much imaginary money that they compromise even academics, who are of course supposed to remain independent;
10) Economists don’t do a good job in this area. The conventional investing advice is rooted in long-discredited economic theories that have hung around because lots of rich and powerful people have built careers rooted in a widespread belief in those theories. These people oppose advances that would benefit millions for self-interested reasons (of which they are probably not fully self-aware);
11) Cognitive dissonance is a powerful force and an exceedingly counter-intuitive force. Does an alcoholic know that he is ruining his life? He does or else he would not be so defensive when asked if he has a problem. But he also doesn’t or else he would take action. Humans are rationalizers. We LOVE investing experts who support our most self-destructive choices because we want to believe in those choices and we are desperate to hear seemingly logical defenses of them; and
12) The industry sticks together. There is an unspoken code in this field that you don’t call out a fellow investing advisor who is talking nonsense. The payoff of course is that no one calls you out either. The result for the investor is that he sees people talking what seems to be nonsense and no one calling them out and he concludes that he must be the one who doesn’t fully understand things. We don’t rely on our b.s. meters in the investing field because the normal rules of checking things out generally do not work.