Getting back to inconsistency-avoidance tendency, can you remember instances when you have used this tendency to your own peril?
As investors, you must learn not to be hasty. Adjourn your stock purchases till you're not clear in your mind.
7. Social proof tendency
Unlike others, he resisted to be consumed by the contagion of corruption. And for that resistance, he was almost about to lose his life.
Do investors in the stock markets also make wrong investment decisions because of the contrast misreaction tendency? The answer is yes, very often.
“Expensive at 140, attractive at 300!”
In the meanwhile, the stock continued to rally. In just a few months, the stock price was hovering around 400.
Why did he not buy the stock at 140? What forced him to buy the same stock at 300?
A similar mistake also occurs with valuation multiples.
How can investors avoid such thinking errors?
What are the risks and opportunities to the business?
Do the company's managers behave like owners?
A wiser response would have been to do what Darwin always did: Challenge the merit of the idea.
It is observed that a vital quality that is common amongst all great investors is discipline.
Our financial needs change with the various phases of our life.
But you may have several other expenses.
Some may counter with the usual argument that investing in stocks is risky.
But it would be a big mistake if you wait until retirement to start investing actively. The preparation has to start much earlier.
But wouldn't old age hinder your thinking abilities and decision making?
12. Authority-misinfluence tendency
Why? Simply because it came from an authority!
Errors owing to the misinfluence of authority are found across all spheres of human life.
Why is man innately wired to follow authority?
The answer probably lies in the way we have evolved over the ages. All our ancestors lived in dominance hierarchies.
Human societies have followed a similar path.
Following authority is not a flaw in itself. In several cases, it is quite crucial.
Uncertainty and risk have a big influence on how independently people take their decisions.
Just spare a moment and ponder about how exactly you decide when to buy or sell a stock.
If your answer is a 'yes' to any one of these, then here are some more questions.
Listening to views and opinions from experts is quite valuable.
'Mr Market' is there to serve you, not to guide you
In an abstract sense, 'Mr Market' (as referred to the stock market by value investing genius Benjamin Graham) is a representation of an authority figure.
The greatest investors in the world are those who do not give in to the moods of 'Mr Market'.
So if you learn to command this peculiar gentleman, you can take advantage when he is gloomy and rack up great businesses at depressed prices.
All creatures survive in groups and the one factor that connects creatures of a species is communication.
But do we always make the most rational and productive use of words? The answer seems to be no.
A certain scientist was curious to know how the honeybees would respond if the nectar was placed in an unusual position.
According to you, what should the honeybee ideally do in such a situation?
Can this behavioural tendency of the honeybee also apply to human beings?
Do we behave to enviromental stimuli like ants?
1. Reward and Punishment Super-response Tendency (Incentive and disincentive-caused bias)
2. Liking and Loving Tendency (Fall in love and protect your capital, not with your stocks)
3. Doubt-avoidance Tendency (Quick conclusions and quick decisions are often preferred instead of the burden of doubts and ambiguity. When neither under pressure nor threatened, a person should ideally not be prompted to remove doubt through rushing to some decision.)
4. Inconsistency-avoidance Tendency (We tend to filter away any piece of information which may be inconsistent to our ideas and beliefs. Be disciplined with your approach: play the devil's advocate or have processes and procedures in place that tend to minimize hasty and biased decision making. Adjourn your stock purchases till you are sure. Stock markets will always keep swinging higher and lower.)
5. Envy and Jealousy Tendency (Greed is fuelled by envy. Avoid discussions that would trigger feelings of jealousy. Keep extremely low profile and keep discussions to stock ideas and business fundamentals.)
6. Over-optimism tendency (Excess of optimism is the normal human condition. "What a man wishes, that also will he believe." The best way is to acknowledge that this bias exists in the first place. Challenge your views by asking yourself as many questions as possible to see if your views can stand the attack of reason.)
7. Social proof tendency ( It is an automatic tendency to think and act the way people around you are thinking and acting. The evil of corruption continues to persist because of the Serpico Syndrome, which is created by the social proof tendency and the power of incentives. It dominates how investors behave in stock markets, how company managemetns (institutional imperative) do business and so on. Have the management act as if they were the owners. Buffett says, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.)
8. Contrast Misreaction Tendency (We perceive everything in relative terms. It influences how we think about economic news and information, corporate performance, stock prices and so on. Contrast misreaction cause people to make wrong judgements based on misleading contrasts between two or more things and situations. For example, a person shifting to another city and looking for a new house and his estate agent using this trick on him. For the investor, why he did not buy the stock at 140 (because it rose from 90) and then he bought the same stock at 300 (because it fell from 450)? A stock with P/E of 50 in past and is now at P/E of 30 does not mean it is a lucrative buying opportunity. Look at the company's business fundamentals and its past financial track record. Valuing the company based on such important parameters will help you avoid false comparisons.)
9. Availability-misweighing Tendency (Due to the relentless flow of news and information, the human mind has a tendency to focus on what's easily available. In doing so, often tend to give undue importance to it. In the absence of relevant information, investors often end up giving undue importance to such insignificant matters. Adopt Charles Darwin's approach. He would try to gather evidence to disconfirm it. Challenge the merit of the idea. Look for potential risks and concerns that could adversely affect the company. The ultimate investing decision should be based solely on your understanding and insght and not from borrowed optimism. Be discipline. To avoid falling prey to this tendency is to prepare an investment check list and adhere to the process in a disciplined manner.)
10. Use-it-or-lose-it Tendency (The importance of regular practice is especially very vital in skills of a very higher order. Many people take investing as a side business which can be done without putting in too much time and effort. And that is one of the biggest fallacies. Legendary investors such as Warren Buffett, Charlie Munger and Peter Lynch did not create great fortunes out of thin air. They are known to be rigorous practitioners of their art. They all read extensively and spend a huge amount of their daily routine analysing companies. By using their mental skills meticulously, they have become successful pilots of the investing world.)
11. Senescence-misinfluence Tendency (At an age when you may not be in the best physical frame to travel distances and perform demanding tasks, what could you do for an alternative source of income? The answer is investing. The real risk of significant losses lies in speculative short-term trading. If you choose the path of long term value investing, you will not only live with minimal risk, but the chances of immense profits will be significantly high. Remember, in the long run, equities tend to outperform all major asset classes. If you develop useful skills early in your life and practice them rigorously over the years, you could manage to retain those skills for a much longer period, despite the aging process.)
12. Authority-misinfluence Tendency (Uncertainty and risk have a big influence on how independently people take their decisions. This makes the stock market a place that is incurably afflicted by the authority-misinfluence tendency. Just spare a moment and ponder about how exactly you decide when to buy or sell a stock. What makes you follow these experts? It is important that you exercise your own independent judgement to the opinions of others. "Mr. Market is there to serve you, not to guide you." The greatest investors in the world are those who do not give in to the moods of Mr. Market. (Mr. Market is a parable told and popularised by Benjamin Graham, teacher of Warren Buffett.)
13. Twaddle Tendency (Man often indulges in petty small talks and chatter. They only become a nuisance when they come in the way of some serious work that is in progress. This twaddle tendency, like the twaddle dance of the honey bees, can lead to unproductive results. And this is what we need to keep a check on. Better to stay in a quiet corner meantime.)