A normal person makes thousands of ‘rational’ decisions on a daily basis – or so we want to believe in. From what clothes you wear to work to signing a million dollar contract, there are countless cognitive stumbling blocks preventing us from acting in our own best interests. Some are sub-conscious – we don’t realise it till we look back after this article.
To bring it back to perspective, many of the biasness illustrated are highly applicable to our investment decisions. There are no bad trades, only bad decisions. There are probably many more biasness, but let us take a look at some of the more common ones.
It brings us to the most important point which is point (4.) Blind-spot bias, which is failing to know thyself.
You are your own worst enemy, and paradoxically your greatest friend.
Self-sabotage is a subtle and insidious process. The most painful experience of failing is not because of I couldn’t do it, but because I didn’t do it. Recognising that you have a flaw is the first step. Going beyond to tackle the flaw is the key.
Even for investing, we can and probably should take steps to minimize unprofitable biases which hinders our decisions-making processes of making more money.
These include:
Clear investment rules and stick to them. I have my own 21 cardinal investment rules. Having a rule book and following through allows you to override emotions and increase potential returns.
Devise personalised investment strategy and believe in it. In market ups and downs, while your strategy could be modified with market conditions, it should be fundamental enough to weather through uncertainties. Some of my investment strategies are customised from
- Time in the Market versus timing the market
- Dollar Cost Averaging versus Lump Sum investing
- Dollar Cost Averaging versus Dollar Value Averaging
- Maximum Pessimism investment strategy
- Nassim Taleb’s Barbell investment strategy
- 52-week High and Low investment strategy
- and more
Make decisions based on facts and figures. Data from as simple as reading a Stock Quote is factual and don’t lie. Do not attach emotions, sentiments or even public perceptions to your core assessment. The crowd mentality may not be always right.
Set reasonable targets and goals. It could be your buy-in price or your sell-off price. It could be your expectation of dividend yield or capital gains. When you chase unreasonable targets, or have goals which are unrealistic to achieve with current market conditions, you unnecessarily put stress on your investment behaviour, which in turn leads to bad investment decisions later on.
Some true life examples of cognitive biasness are discussed in the following sketch. Too often, we focus our attention on successful outcomes and ignore the accompanying failures. The survivorship bias illustrates this point very well.
In WWII, allied forces studied planes that survived being shot to discern armor placement. Planes coming home from battle have bullet holes everywhere but the engine and cockpit, so the engineers wanted to put armor everywhere but the engine and cockpit. By neglecting bullet holes on lost planes, they missed armoring planes’ most vulnerable areas.
If I invest like Warren Buffet, I will be successful. If I read the biographies of the world’s most successful investors or traders, I’ll be a successful investor or trader. If I copytrade a renowned trader, I’ll profit like him. Steve Jobs, Bill Gates, and Mark Zuckerberg dropped out of college and became millionaires, so will I.
And the list goes on.
To sum up, any investors can develop over time the hard skills of investment know-how, analytic abilities and behavioural clarity to gain profit. The behavioural mastery to think, decide and act is usually the one lacking.
Most investment decision-making activities in the market are driven by fear and greed, or the primordial need for survival and success. Cognitive biasness are mental short-cuts to operationalise the decision-making process. While unavoidable, widespread or persistent for some, the only way to make better investment decisions is to understand and overcome them.
I will leave it as it is. You probably need some time to digest this. Going forward, how would you attempt to deal with your cognitive biasness?
Theory of Constraints 
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