Cognitively Yours

  Raja R,  Au thor "Hardwired to short term and impatience for instant gratification lead to sub-optimal returns and may result in one falling short of one’s  long term goal" In the last blogs, we had seen how we find things through mental short cuts-by trial and error leads people to develop rules of thumb and this results in errors. The mental short cuts are like back of envelope calculations and one has to the understand the limitations of these short cuts. We had seen our fear of regret leads to sub-optimal investment decisions. Regret bias also leads to procrastination and comfort in status quo. In this blog, we will discuss that which is closely related to what we discussed in the earlier blog. Impatience or present bias leads to sub-optimal financial decisions. We as investors choose immediate gratification instead of taking advantage of larger longer-term pay offs. The measure of impatience is a strong predictor of retirement savings and retirement of healt...

Raja R,  Au thor "The mental short cuts are like back of envelope calculations and one has to the understand the limitations of these short cuts" In the last blog, we had seen how we find things through mental short cuts-by trial and error leads people to develop rules of thumb and this results in errors. The mental short cuts are like back of envelope calculations and one has to the understand the limitations of these short cuts. Why investors have not done so well when the markets have done decently over the last four decades. A passive investor would have got double digit returns by investing in the index. One reason is that people are more sensitive to losses than to absolutely commensurate gains. The loss has about a two and a half times the impact of a gain of the same magnitude. This explains the reluctance of investors who refused to invest when the market was down in the dumps a few months before. Investors were wary of entering the market fearing further los...

  Raja R,  Au thor "Emotional reactions of investing in equity have often diverged from the cognitive assessment of risk of investing in equity" Friends! Welcome to the series Cognitively Yours. It is an endeavour to explain what biases affect our plan to accumulate wealth. In a series we discuss biases which make us stumble into mental pitfalls. The market is at all-time high and has done extraordinarily well during the last nine months. Whether investors have done well? Even over long term the equity markets have provided decent returns, but not all investors have benefited by it. Emotional reactions of investing in equity have often diverged from the cognitive assessment of risk of investing in equity. Fear of equity has done more damage than investing in equity. Financial decisions are made in situations of complexity and uncertainty which prevent us from relying on fixed rules and also compel us to rely on intuitions. When faced with complex problems like investing f...