“Investing is the art of decision making.” – Anonymous
So it’s not by Anonymous. I wrote that five seconds ago. By saying it was by Anonymous your brain quickly starting trying to put some old, famous person to the quote. That’s what our brains do. They are constantly trying to make sense of the world.
The problem is that our brains are ill-suited to investing. I recently came across a handful of posts that touch on the topic of decision making. What they all show, in one way or another, the challenges we have as decision makers, like:
- Events we experience first-hand are more salient than those lessons learned from a book.
- We are frequently in cognitive overload.
- We are overconfident is some realms, and underconfident in others.
- We don’t look for enough alternatives when making decisions.
- We don’t systematically search for contrary evidence.
The challenge isn’t finding new ways in which our brains work against us as investors. The challenge is putting those observations into action. Saying that our decision making powers are less than ideal is almost a cliche these days. The hard part is putting in place systems, i.e guardrails, that help us from making the same mistakes in novel ways.
The observations above were taken from the posts below:
“What I’ve experienced as an investor is different from what you’ve experienced, even if we’re from the same generation. And the generation and country you’re born into, the values instilled in you by your parents, and the serendipitous paths we all wander down are out of our control.’
“Every minute on a website is a minute not spent doing something else. Every decision about what to write in social media is enervating. It’s not like the old days, with just three TV channels and a TV Guide to make that difficult decision even easier.”
“One of the implications of this research is that people may systematically underestimate their ability to do really hard things that they have never tried before — a notable exception being men’s rating of their ability to handle a zombie apocalypse.”
“It is not easy to develop alternative choices. We naturally like to limit our choices because our ability to process multiple pieces of information is limited. We also have a problem with processing alternative models that may be in conflict. Alternative models require acceptance of disorder when we prefer an ordered world that follows a few simple rules. So what should an investment manager do?”
“When researching potential asset managers to hire, most people set up the null hypothesis wrong. In conducting due diligence on investment firms, the correct null hypothesis should be that there is no alpha present. In other words, we should assume that any strong past returns are instead the result of luck or unintended factor tilts, unless significant statistical evidence to the contrary can be accumulated. “