We’ve all made illogical decisions, but have you ever stopped to ask why? Or how we justify them to ourselves? An article about bad investment decisions - first printed in USAA, later picked up by a flying magazine I often read - described in detail the less-than-rational thought processes people follow in investment decisions. Surprisingly, the flying magazine was able to draw parallels to bad flying decisions. The ideas presented in the article are worth a look to improve your own investment decision-making. Here are some of the findings, broken down into 6 categories. Do you see yourself in any of them?
Loss Aversion: People faced with certain loss will do anything to avoid that loss. For example, they will hold on to a losing security (or property) with little chance of gain, to avoid certain loss by selling.
Regret Theory: People who have made a mistake are motivated not to deal with that error. They procrastinate decisions that must acknowledge their poor original decision.
Overconfidence: The original mistake may have been based on overconfidence. Like Garrison Keilor’s Lake Wobegon, where all the men are strong, all the women are good looking, and all the children are above average, we tend to believe we are above average. Researchers have found that 90% of all pilots believe themselves to be above average. I know I am…
Strength of an Idea: Once we get an idea in our heads it can be very hard to change that idea, even if it is wrong. Data may overwhelmingly indicate the contrary, but our personal reality won’t allow us to take that data into account.
Wishful thinking: In a difficult situation we may make decisions based on our desire that things will improve, even though that desire is not based on facts. Our wishful thinking tells us that it can’t be that bad. Polly Anna at her best.
Easiest way out: In a crisis, we are often overwhelmed with a lot of data, most of it bad news. Because we can only process so much data, we give up and take what appears the easiest way out - even though it may not be the best.
I certainly recognized some of these tendencies in myself. While they
seem to be part of our psyche, we can fight back. By knowing about them
we can set off little alarms in our heads that we are succumbing to one
or more of these tendencies.
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