A few days ago, I was golfing with my buddy Don. We are both in our mid-fifties, empty nesters, and only a bit in denial that we’re in the second half of our lives. Our conversation turned to finances, and Don expressed regret over some financial decisions he’d made as a younger man.
“I’ve been an investor my whole life. I’ve done alright, maybe better than most. But as I get older, I am painfully aware of how many investment decisions I made that were poor just because I wasn’t thinking right.”
I nodded, considering how most of us probably weren’t thinking right in our twenties and thirties.
“I was either afraid, or egotistical, or close minded…it’s a long list. Do you think young people are aware of how much their mental state can affect their investing decisions? Do you think there’s any way to minimize the damage?”
I assured Don that he was, indeed, not in his right mind. But offered this consolation: the rest of us are in the same boat.
Much has been written in the past few years about “investor behavior,” focusing on why people misbehave when it comes to their money.
Overall this is interesting stuff, because it’s always fascinating to see how many ways we can keep shooting ourselves in the foot financially. It’s an economic (and more scholarly) version of the never-ending stream of “fail” videos posted on Facebook – people intending to jump, dance, ride motorized vehicles or just chew gum and walk at the same time…but inevitably face planting, either literally or figuratively.
Something in us loves to see the infinite variety of ways other people fail. Maybe it takes our minds off that time we…yeah, well, never mind.
My only complaint with all the literature and research on investor behavior is the unspoken requirement that all descriptions conform to scientific sounding nomenclature. So there are articles on confirmation bias, loss aversion, herding, choice paralysis and prospect theory. Without further explanation, you would have no idea what these terms mean.
Defrocked of their scientific sounding terminology, these terms are all just descriptions of what we used to call human nature.
I shared with Don that I’d recently listened to a talk given by Albert Mohler, a seminary president, on his view of how the fall of man affected man’s ability to properly reason. His observations and explanations were biblically based, but I found great similarity between his description of flawed human reasoning and the explanations for investor misbehavior offered up by behavioral investment theorists.
Mohler enumerated fourteen specific ways humans’ minds work, but defectively. Consider just a few: We are ignorant of the facts – we don’t know what we don’t know. We are forgetful, easily distracted, easily prejudiced, have limited perspectives, get intellectually fatigued, reach illogical conclusions and are intellectually apathetic. Just to name a few.
Mohler was not intending to offer investment advice in his talk, but he does offer up a helpful warning to Don – his greatest investment risks may not be external, but internal.
Or as the cartoon character Pogo famously said a generation ago, “We have seen the enemy…and he is us!”
So what advice can Don pass along to his kids about how to be both good investors and flawed humans?
Awareness. You can’t deal with a problem you don’t know about. Awareness of your own thinking flaws won’t make them go away, but once you know the problem exists, you can address it. And the best way to address it is to recruit some…
Accountability. If we are all flawed in our thinking and reasoning capacities, at least we are flawed in different ways! A second set of eyes on our most important decisions, financial and otherwise, is necessary to help us deal with our own blind spots.
Advice. Flawed thinking muddles our priorities. What should I do next? What is the most important action to take now? What am I forgetting? Advice is the voice you invite to speak into your life and the trusted source that can call you out when need be.
It’s sobering to realize how flawed our perspectives, responses and thinking can be.
But awareness of the problem, accountability to deal with it and advice on what to do next can be important tools to help lift the fog on cloudy thinking.