Cognitively Yours 1.7

Raja R, Author

"Perfect Planning and Preparation could prevent Poor Performance"

In the previous blogs, we discussed how mental shortcuts though needed to take quick decisions as well as fear of regret may also lead to biases which result in sub-optimal investment decisions. We had also discussed how impatience and need for instant gratification make us hardwired to short term. We also saw how we react to events and announcements on a stand-alone basis. We had seen how our predictions cannot be right all the times and we should accept error in order to reduce errors and we can never be error-free in our predictions. In the last one, we saw, with the help of a story, how we prepare for near-term outcomes and do not venture to look far ahead.

In this blog, let us analyse the reactions to the recent thumping victory of the home team over the visiting team. The victory has been hailed as a great achievement and some of the architects of this victory have been acclaimed as the best ever in the cricketing history. A few months down the line, the home team will become the visiting team and the roles will be reversed. The conditions will change dramatically and the results may be different. But, we will find it difficult to imagine how the winning team will struggle in alien and swinging conditions. 

“Emotional time travel isn’t our species Forte”. We cannot imagine how we will behave in the future, in the heat of the moment, when asked in the cold light of the day. Just after consuming a hearty lunch, the worst thing we can do is to plan for dinner.

Imagine you are lost in the woods. You realise that you have forgotten to bring both food and water. Which would you regret more: not bringing the food or the water? Psychologists have asked exactly this question of two different groups and offered them a bottle of water in return for participating. One group was asked just before they started to work in a gym; the other group was asked immediately after a workout. If people are good emotional time travellers, the timing of questions should have no impact at all. However, 61 percent of the people who were asked before the workout thought they would regret not taking water more. However, after the workout, 92 percent of the people said they would regret not taking water more.

Does this echo in investment? Markets ruled high during January 2020 and many did defer investing, waiting for a correction, to enter at lower levels. Their intent was definitely to invest at lower levels. But when the market did correct in the second fortnight of March 2020-- when the market fell by over 35 percent, not many would have really ventured and invested when the going was tough. How to avoid this pitfall of delaying things and not seizing the opportunity when the opportunity strikes you? 

Sir John Templeton, legendary investor provides a perfect example. We had used his quote in the last blog. “Buy when everyone is despondently selling”. It is easier said than done. There are challenges psychologically as it is difficult to maintain a mental equanimity or equilibrium when there is a sharp sell-off. John Templeton always kept a wish list of securities representing companies that he believed were well-run but priced too high. He often had standing orders with his brokers to purchase those stocks in his wish list if for some reason the market sold off enough to such levels which he considered a bargain. Willpower is definitely human’s greatest strength. The best strategy is not to rely on it in all occasions. Save and reserve it for emergency situations. These mental tricks like those practiced by John Templeton enable you to conserve willpower for those moments when it’s indispensable. These techniques do require willpower but leave you less depleted.

Pre-commitment and perfect planning enabled him to ward-off the emotions from the situation and take a well-informed and judicious decision.

“Perfect Planning and Preparation could prevent Poor Performance”

Reference: James Montier’s The little Book of Behavioural Investing.

Photo by Adeolu Eletu on Unsplash