Why do I get this feeling that human beings just weren’t built for capital markets? I agree with Barry Ritholtz somewhat.
“We have numerous design flaws that work against us in the investment process. But once you become aware of how they impact your thinking, you have a chance at avoiding some of the more damaging behaviors. At the very least, you can try to work around some of these hard-wired foibles.”
Think of ego that don’t let you acknowledge a stupid pick. It’s not so easy to suspend your conviction that led you to it. Ego is why we selectively perceive data, why we emphasize that which confirms our prior views. It helps us ignore new data that may contradict our preconceived notions. It even facilitates our forgetting information that is inapposite to our viewpoint.
We might have enjoyed 10 good GDP reports in a row, but let one bad one slide out and we become fearful and nervous. Could that be the case? Not likely.
Then, the famous twins – fear and greed. These are the best-known market emotions, and they cause all sorts of problems for investors. Driven by the hormonal effects of dopamine and adrenalin, our passions have an unfortunate tendency of getting the better of us at exactly the worst possible moment. It’s not merely chasing hot stocks at the top or getting panicked out at the bottom that’s so problematic: It’s the impulsive destruction of our investment strategy and long-term plan.
Don’t think of getting some serious brain damage just yet. But I would certainly recommend a catharsis !