Thoughts on Investing

 Thoughts on Investing---from Barry Ritholtz

            Mistake #8: Cognitive Errors.

These are the errors that are inherent in our wetware – namely, the way your brain has evolved over the millennia. Suffice it to say that capital risk decision-making was not a big issue on the Serengeti plains. On the other hand, avoiding getting eaten by lions was.

Hence, Humans have a number of unfortunate tendencies as a result. These tend to  get in our way when it comes to investing:

• We see patterns where none exist;

• We have difficulty conceptualizing long arcs of time;

• We selectively perceive what agrees with our pre-existing expectations, and ignore things that disagree with our beliefs.

• We tend to forget our losers and over-emphasize our winners.

• Our inherent optimism bias turns out to be hard-wired as well — our brains are better at processing good news about the future than bad.

• We actually get a greater thrill from the anticipation of a financial reward than the actual reward itself. (Think what this means in terms of Buy the Rumor, Sell the News)

• We seek stimulus for the dopamine high — regardless of how. Whether you are a Gambler, Alcoholic, Sex Addict, Shopaholic, or Hyper-Active Trader — its all the same buzz.

• Story-telling is how Humans evolved to share information (Pre-writing). Thus, we are vulnerable to anecdotes that mislead or present false conclusions unsupported by data.

In short, we simply are not wired for the required risk analysis inherent in investing.
These cognitive foibles that affect all of us have a significant impact on our decision making, whether we are aware of them or not.  We cannot avoid these built-in shortfalls. Its how we are made. But if you at least become aware of these processing issues, you have some hope to avoid their most pernicious impact