I was reading an old (2009) post from the investor magazine written by Tim Christoffel (Psy-Fi blog) and I thought you might like this. Remember it was written for stock market investors but the psychological quirks he highlights apply to everyone both in their business and personal lives.
“Here are seven psychological quirks to look out for.
1. Overconfidence and optimism
Most of us are way too confident about our ability to foresee the future, and overwhelmingly too optimistic in our forecasts.
This finding holds across all disciplines, for both professionals and non-professionals.
Lesson: Be careful about trusting your gut feelings, (there is a big BUT here which I will revisit later)
2. Hindsight
We consistently exaggerate our prior beliefs about events.
Market forecasters spend a lot of time telling us why the market behaved the way it did. They’re great at telling us we need an umbrella after it starts raining as well, but it doesn’t improve our returns. We’re all useless at remembering what we used to believe.
Lesson: Keep a diary, revisit your thinking constantly.
3. Loss aversion
We hurt more when we sell at a loss than we feel happy when we sell for the same profit. But stocks don’t have memories – decisions on whether to buy or sell should always be independent of your buying price. More recent research in the real world shows, however, that experienced traders don’t suffer from loss aversion the same way that novices do.
Lesson: Ignore buying prices when deciding whether to sell.
4. Regret
Investment decisions should overwhelmingly be about risk, and risk implies a judgement, which may turn out to be wrong, often through bad luck rather than bad thinking.
Becoming overly focused on past decisions that have gone wrong without analysing whether the decision made was sensible under the circumstances isn’t rational. Investing involves making mistakes and is often down to luck.
Lesson: Learn to live with mistakes.
And 5 to 7, well that’s for next week.
Have a great week
Paul