Cognitively Yours 1.3

 

Raja R, Author

“Investing is a continuous process too; it isn't supposed to be interesting"

In the previous blogs, we discussed how mental shortcuts lead to biases which result in sub-optimal investment decisions. We had also seen how fear of regret affects our decision to invest. In the previous blogs, we also discussed how impatience and need for instant gratification make us hardwired to short term.

We somehow overcome these biases and invest. We track our investments. Do we allow them to settle and then review the rewards? Most of us do not give time for investments to flower. “Investing is a continuous process too; it isn't supposed to be interesting. ...Benign neglect is the secret to long-term investing success. If you change your investment policy, you are likely to be wrong; if you change it with a sense of urgency, you're guaranteed to be wrong”. We do like to see quick results, we also love to be doing something, as opposed to be doing something.

An interesting research of the penalty kicks of soccer from top leagues and championships worldwide revelated that the penalty kicks were equally distributed with one third of the kicks aimed at the right, center of the goal mouth. However, the goalkeepers displayed a distinct action bias. They dived either left or right 94% of the time hardly ever choosing to remain at the center of the goal post. Yet, they would have been much more successful, had they remained at the center of the goal post.  Remaining at the center of the goal post, he would have saved 60 per cent of the kicks aimed at the center, far more than his saving rate, when he dives to the left or right. However, the goal keepers remain at the center only 6 per cent of the times. The defense given by the goal keepers was that they feel that they are making an effort to stop the goal by diving to the left or right, whereas standing at the center and seeing the goal scored to the left or right of you would make you feel much worse. In reality, nothing would be worse than losing, regardless of where you stand.

In investments too, many a time, there is a distinct bias for action. True, there are times when corrective action is requited, and one has to act. But many a time, when it requires sometimes for investment decisions to show results, we tend to make too many changes in too short a time resulting in the entire investment decision going awry. This is like not allowing milk to which two spoons of curd is added to ferment, but in the hope of quickening the process, stirring the milk at frequent intervals. The end result that the curd is unfit for consumption.

"Don't underestimate the value of Doing Nothing, of just going along, listening to all the things you can't hear, and not bothering."-A A Milne.

 As Blaise Pascal put it “All of human unhappiness comes from one single thing: not remaining at rest in a room”.

In investment, we should need to differentiate what needs corrective action and where status quo have to be maintained.