Curious Investor Behaviour

Program your mind for rational investing

Of all the challenges an investor faces, the most difficult to overcome are often those in our psychology. Cognitive biases and behavioural heuristics are a universal part of being human. But, to be effective in the stock market, we need to guard our irrational instincts and program ourselves to avoid those behavioural pitfalls.

Of all the challenges an investor faces, the most difficult to overcome are often those in our psychology. Cognitive biases and behavioural heuristics are a universal part of being human. But, to be effective in the stock market, we need to guard our irrational instincts and program ourselves to avoid those behavioural pitfalls.

Framing

Do you feel the same about having a ‘40% chance of winning’ and ‘60% chance of losing’? The same piece of fact is often interpreted differently and can affect us differently, depending on how it is ‘framed’ or presented.

Try to question each decision and outcome by examining it from multiple angles. This helps avoid taking information at face value.

Loss Aversion

Ever found yourself hanging onto falling stocks in the hope of a rebound that was not in fact forthcoming? You are not alone.

Losing $100 has been shown empirically to cause twice as much pain as the pleasure one derives from gaining the same amount. The impulse to avoid (the pain of) losses at all cost can often lead to irrational decisions.

Confirmation Bias

No one likes being shown to be wrong, whether by our colleagues or by the stock market. We therefore subconsciously seek out and emphasise information that reinforces our view while ignoring or downplaying information that contradicts it.

To get closer to the truth, we must not wallow in the comfort of our preconceptions and prejudices and listen to those with a different point of view.

Cognitive Dissonance

When reality and our beliefs are in conflict, humans have a tendency to ‘rationalise’ the uncomfortable contradiction, to explain away the incongruity, by inventing excuses.

As investors, do you ever find it difficult to let go of an idea or a stock that you are attached to? Re-assess your thesis when the evidence is against it, instead of tweaking the evidence to justify it.

Availability Bias

It is easier for our brains to draw ideas from the more recent and salient information. This behavioural flaw causes us to attach more significance to events that have recently received heavy media coverage than they warrant.

Studies have found that companies with the highest press coverage in a given year tended to underperform in the next. Think twice before you buy stocks that appear in every news headline.

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