8 December 17

What is the common psychological flaw that can make us less successful at investing?

Perhaps the most unhelpful of the psychological flaws we are prone to as investors is ‘confirmation bias’. Our desire to seek out information which reinforces our existing beliefs and to reject anything which undermines our prejudices is powerful and dangerous.

As Warren Buffett said: ‘what the human being is best at doing is interpreting all new information so that their prior conclusions remain intact’.

We all do it, in all areas of our lives. Climate change, homeopathy, the stock market, Brexit – we all mistake the desire to be right (the commendable search for truth) with the desire to have been right, which is often simply the pride that comes before a fall. We cling onto our beliefs because to entertain the opposing argument is cognitively painful.

Investors are particularly vulnerable to mental shortcuts. They are easy and require little energy. This is pretty much essential in an activity like investment in which the amount of information that could be relevant to our decisions is infinite. We obviously have to be selective in the ideas we use; but we don’t have to, and shouldn’t, prioritise the data which simply allows us to come to the conclusions we want to reach.  To read more click on this link: https://goo.gl/SvRgHQ