1/ "The same thing happened today that happened yesterday, only to different people."
~Walter Winchell
~Walter Winchell
2/ I have long contended that in the battle for investment success, investors are their own worst enemy. my first investment research in 1989 in a paper entitled "Quantitative Models as an Aid in Offsetting Systematic Errors in Decision-Making." (I've gotten better with titles.)
3/ I tried to demonstrate that human beings ultimately determine how stocks are priced. Since we don’t check human nature at the door when entering a stock exchange, I argued that we could learn a great deal from psychological studies
4/ that proved that in uncertain situations, our judgment is systematically flawed. All too frequently, investors ignore logic and reason. When trying to make good investment decisions, investors fall back on their own worst impulses.
Fear, ignorance, greed, and hope conspire
Fear, ignorance, greed, and hope conspire
5/ to rob us of our ability to make sensible, intelligent decisions about the market. We let our feelings overcome reason and take shortcuts that violate all logic. We live in the here and now—not the past or future. today’s information or today’s catchy headlines get filtered
6/ through our emotions, we give them the greatest import, giving far too little import to longer spans of time. (thus, recency bias is one of the most pernatious of our foibles)
What the market did today or this week is quite meaningless to long-term investment performance.
What the market did today or this week is quite meaningless to long-term investment performance.
7/ Amos Tversky and Daniel Kahneman are considered the founding fathers of behavioral finance. Through their research of a host of biases, they found that they replicated with different groups of study participants and posited that the errors were so common, they
8/ concluded that these errors can be predicted and categorized. The worse news is that even armed with this knowledge, investors keep making the same mistakes over and over again.
9/ Our universal HumanOS programs us to believe that while these errors might affect other people, we are personally immune.
A bug in HumanOS allows us to see problems in *others* while blinding us to our own susceptibility.
A bug in HumanOS allows us to see problems in *others* while blinding us to our own susceptibility.
10/ As Kahneman says, “these are cognitive illusions that will not go away just because we know them.”
While we *intellectually* understand these biases, we don't *emotionally.*
The 2 are very different understandings, and affect very different parts of our brains.
While we *intellectually* understand these biases, we don't *emotionally.*
The 2 are very different understandings, and affect very different parts of our brains.
11/ Evolution has optimised us for a world that no longer exists. Our HumanOS has a difficult time differentiating between *real* and *perceived* danger, and our HumanOS allows BOTH to be thrown to the most primitive part of our brains to decide what actions we will take.
12/ Since even imagined dangers translate to our brains perceiving them the same as real dangers, we normally choose between fighting and fleeing. It's difficult to recall the visceral feelings this limited menu of potential actions gives rise to, even when you're trying to
13/ recall the last time something real actually scared the living daylights out of you. That's another part of our HumanOS, flood the system with cortisol and adrenaline and our behavior becomes reflexive to the point that later recall of it when we're calm leaves us baffled
14/ primarily because our minds are make in "normal" mode and all of those chemicals have drained out of our systems. These behavioral kinks are so insidious that you could read this entire thread, believe it, and then panic and sell your portfolio if the market was plunging
15/ after you got done reading the thread. I've written a series of longer posts that I will link to here and suggest that you give them a read. You'll see I wrote them 7 years ago, but my research suggests that they are evergreen--7 years or 70, we haven't seen much improvement
16/ in our HumanOS, making these problems devilishly hard to solve. I suggest developing a process that focuses on as automated an investment process as you possibly can and then letting that process work. I also have come to think that it might be beneficial for you to do
17/ a little "mental" accounting and reserve a portion of your long-term investment account for a "mad money" category that I would strongly recommend you label as an entertainment expense.
This will let you avoid FOMO with larger portions of your nestegg.
This will let you avoid FOMO with larger portions of your nestegg.
18/ It might even help you understand, over time, that these lottery ticket speculations are just that and if you keep a log of wins and losses, the probabilities are high that even though you'll keenly remember and maybe even brag about your winners, the true tally will show
19/ an aggregate overall loss from all those fun plunges you took on the story and which your memory--which is almost always an unreliable narrator--conveniently forgot. We're complex beings, but some of our problems are pretty simple and building safeguards can save you a ton.
20/ Here are some of the longer form pieces that detail just what we're all up against:
jimoshaughnessy.tumblr.com/post/964710850…
jimoshaughnessy.tumblr.com/post/964710850…
24/ And remember--these biases affect ALL of us. No one is exempt. Unless, of course, you're not a human. Then, and only then, can you think they don't apply to you. Because they certainly apply to me, and everyone I know.
(Except this guy 👇🏻)
(Except this guy 👇🏻)
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