Selective Memory
Few of us want to remember a painful event or experience in the past, particularly one that was of our own doing.
In terms of investments we certainly don't want to remember those stock calls that we missed (had I only bought eBay in 1998), much less those that proved to be mistakes which ended in losses.
Such memories threaten our self-image.
Cognitive dissonance
How can we be such good investors if we made those mistakes in the past?
Instead of remembering the past accurately, in fact, we will remember it selectively so that it suits our needs and preserves our self-image.
Incorporating information in this way is a form of correcting for cognitive dissonance, as well-known theory in psychology.
Cognitive dissonance posits that we are uncomfortable holding two seemingly disparate ideas, opinions, beliefs, attitudes, or in this case, behaviours, at once, and our psyche will somehow need to correct for this.
"Perhaps it really wasn't such a bad decision selling that stock?"
"Perhaps, we didn't lose as much money as we thought?"
Over time, our memory of the event will likely not be accurate but will be well integrated into a whole picture of how we need to see ourselves.
Representativeness
Another type of selective memory is representativeness, which is a mental shortcut that causes us to give too much weight to recent evidence - such as short-term performance numbers - and too little weight to the evidence from the more distant past. As a result, we will give too little weight to the real odds of an event happening.
Few of us want to remember a painful event or experience in the past, particularly one that was of our own doing.
In terms of investments we certainly don't want to remember those stock calls that we missed (had I only bought eBay in 1998), much less those that proved to be mistakes which ended in losses.
Such memories threaten our self-image.
Cognitive dissonance
How can we be such good investors if we made those mistakes in the past?
Instead of remembering the past accurately, in fact, we will remember it selectively so that it suits our needs and preserves our self-image.
Incorporating information in this way is a form of correcting for cognitive dissonance, as well-known theory in psychology.
Cognitive dissonance posits that we are uncomfortable holding two seemingly disparate ideas, opinions, beliefs, attitudes, or in this case, behaviours, at once, and our psyche will somehow need to correct for this.
"Perhaps it really wasn't such a bad decision selling that stock?"
"Perhaps, we didn't lose as much money as we thought?"
Over time, our memory of the event will likely not be accurate but will be well integrated into a whole picture of how we need to see ourselves.
Representativeness
Another type of selective memory is representativeness, which is a mental shortcut that causes us to give too much weight to recent evidence - such as short-term performance numbers - and too little weight to the evidence from the more distant past. As a result, we will give too little weight to the real odds of an event happening.
