As promised here are the remaining quirks from Tim’s article. All of them apply equally to our business and personal lives, not just stocks and shares.
5. Anchoring
Ten years or so of research have shown we have a nasty tendency to ‘anchor’ on specific numbers. Psychologists can change the results of simple estimation questions (for example, how old do you think Woody Allen is?) simply by posing an earlier unrelated question containing a number.
Lesson: Don’t get fixated on specific numbers, such as buy prices, stop loss prices or index values.
6. Recency Bias
We pay more attention to short-term events than the longer-term. So the effect of a short-term downturn in a company’s fortunes may be exaggerated, or we may simply assume that current market conditions will persist forever.
Lesson: Buy some history books, and look beyond the short term.
7. Confirmation Bias
We just love other people to confirm our decisions. And other people just love us confirming their opinions. In fact we could just get together and have a regular love-in but it doesn’t make for good investing. The only money you lose is your own.
Lesson: Make your own decisions; don’t worry about what others think.
Special bonus quirk!
As a bonus investment quirk, my all-time favourite is Myopic Loss Aversion. This is where investors can’t stand the sight of red ink in their portfolio – they avoid short term losses at the expense of long term gains.
Such people should be physically restrained from buying stocks. Let them play checkers with five-year olds or something they can always win at.
Conclusion
Many people who invest heavily in stocks tend to heavily exaggerate their own abilities and downplay the role of luck in stockmarket investment. Sadly there is a lot of random stuff in the market which we can’t control.
The easiest way of managing these psychological ticks is to invest regularly and for the long term in index trackers and avoid selling no matter what the circumstances.
Failing that – go take a course in weather forecasting. At least you’ll be more help than most market forecasters who can only tell you that you need an umbrella after it starts raining.
Have a great week
Paul
P.S. Woody Allen is 87 (it’s August 2023 as I write this). Most people guess lower, unless they really know the answer.