The 5 Mistakes Every Investor Makes And How To Avoid Them by Peter Mallouk is an excellent book for anyone interested in making sure the financial side of the biz of you is on track for future goals. It is helpful whether you are a high school grad, around retirement and every age between. A particular section on not letting yourself get in the way talks about the common mental biases we all share that cause poor decisions concerning our investments. Relative to the Biz of You these same biases effect our daily decisions on how we invest our time and energy.
- Our Overconfidence Bias has us thinking our judgements are reliably more accurate than the objective accuracy of our judgements. We are more sure about being correct than we actually are. We think we know the right way to do things and don’t listen to the experts telling us a better way. Why engage the team when we know we are right! Why listen to feedback when we have little to no doubt?
- Our Confirmation Bias has us interpreting information in a way confirming our beliefs and judgements. Not only are we overconfident about what we think is right, we also cherry pick information or translate available information in ways confirming our judgments. We see what we want to see.
- Our Anchoring Effect has us relying more heavily on the first piece of information offered (i.e the “anchor”) when making decisions. So when we go about our judgements, we take the first piece of information and anchor ourselves to the facts we see confirming our beliefs about the decision at hand. We focus on the shiny thing, the biggest problem and don’t see the truth behind what’s right in front of us.
These first three biases combine into a what I think of as the Napoleonic Effect, not to be confused with the Napoleon Complex. When dealing with issues, we go with the first piece of information and use additional information to confirm what we already know is the right course of action because we are confident in our experience. If we allow ourselves to do this over long periods we can even develop overly aggressive behaviors which start effecting all aspects of our lives. We can also outsmart ourselves further exacerbating the Napoleonic Effect by knowing we are biased and asking questions of those around us in ways reinforcing our position. Instead of asking how we may be wrong, we ask for information that goes through our biases further entrenching us into our way of thinking.
The down side of the Napoleonic Effect is being prone to reflexive control. People, organizations and governments can camouflage their intentions in the mind of our inner napoleons by planting and nurturing seedling ideas. Throwing out an idea in a non-confrontational manner in a conversation or media event not specifically about the idea drops the anchor. This may be done with a joke or making light of a difficult situation. Confirmation is gained when the idea is dropped again in a separate conversation or other exchange. The confidence of our inner napoleon then brings up the idea as a solution while not realizing the root of the idea came from outside. As long as an individual dropping the anchor is not concerned for their own ego, they get what they wanted through the napoleon they reflexively controlled.
Please note, I’m not a psychologist. These are just my thoughts on how we all combine overconfidence, confirmation and anchoring in ways causing us to react or be controlled instead of fostering our personal vision of an improved future. We reduce our capacity for independent action when we let our “preprogrammed” biases run the show. That’s why understanding how our biases effect our decisions is important to managing the biz of you.
- Our Loss Aversion sees the loss of $5 dollars as a big deal whereas a $5 gain is less powerful. This aversion has us hoarding onto what we think we have instead of opening ourselves to the possibilities right in front of us. We hear that the market is going to drop and move our investments to cash which undermines our ability to meet our goals. We react in fear to information instead of proactively moving to meet the need of the unfolding situation.
- Our Mental Accounting lumps information into categories instead of seeing dollars as dollars. We misallocate resources to groceries as we lump so much into that bucket of expenditures. We spend less in cash at the supermarket and more when using a debit card even though both draw on the same economic resource. This lumping allows us to “grok” information thereby feeding our confirmation and overconfidence biases. This is true not just of money and resources but our intellectual and emotional capacity. We lump information together so we can “understand.” We lump emotional states together and project our energies outward instead of dealing with our inner shit.
- Our Recency Bias sees the events happening in our short and near term memory as more significant than the trends occurring over the the long term. We see the daily exaggeration of events as unique and project our experience into the future. It’s as if we forget the past and the cycles through time getting us to this moment. This mental shortcut makes predictions about the future while being anchored in recent experiences. This not only creates a slew of problems for our financial investments but also our time and energy. This reduces are ability to learn from the past and leads us into repeating mistakes.
- Our Negativity Bias contorts our reality by making us think and feel that negative things have a greater impact on us than neutral or positive things. Bad stuff is greater than good stuff. We spend more time and energy on the bad things by giving them our attention and actions. Over time our attitude mirrors this effect. While this was effective thousands of years ago when we had to cross a grassy field and saw every movement as a potential predator. Today, it allows people and organizations to manipulate us to their ends.
- Our Inner Gambler gets more aggressive when we win which increases the probability of us losing at whatever we may be playing. We anticipate winnings to continue even though the probability doesn’t change. We feel we are on a winning streak.
Our minds have millions of years worth of programming enabling us to make quick and effective decisions to stay alive and continue the species. The issue is our evolutionary programming does not facilitate good rational decisions and does not foster long-term success. Rather our programming is built for short-term survival. Compounding our dilemma is the fact our biases feed one another. Fear, greed and our herd mentality clouds our near-term judgements to the point of losing site of the consequences of our actions. We avoid pain or seek pleasure which more often than not does not promote our success in the long-term. We embrace our inner napoleon and react without thinking instead of managing the biz of you.
So, what can we do? Simply put, we need to learn how we get in the way of ourselves. To do so, we need to listen to the feedback from our environment and others. We need to learn how to observe our thoughts, feelings and impressions without judgement or immediate action. We need to seek independent verification of our decisions instead of just going with what feels right. What feels right may indeed be what we need to do, but we need to ground our feelings in objective feedback. As we go through our daily decisions we may not have someone or an independent source to bounce things off of. In this case, we can ask ourselves a simple question, ‘Does this serve me in the long-term?” Adopting a long-view of our situation helps us gain perspective on our fears, greed and attachment to the herd. Perspective brings better decisions. More importantly, using a long-view approach to decisions gives us more life satisfaction. When we look back, we have less regrets. We find more appreciation for how we got where we are. This in turn creates a positive feedback loop within ourselves and we use our long-view more and more.
So ask yourself, what’s your long view look like?
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