Over the last few months we’ve looked closely at all the different ways our brains try to help us get through life, but end up stepping on our toes when it comes to investment. The purpose of this series has been to show you that while you can’t avoid these quirks (after all, they’ve developed over millions of years in the human psyche) you can at least be informed and spot them at work.
This summer we saw some amazing performances at Glastonbury, but along with the big names, part of the beauty of a music festival is discovering the bands you’ve never heard of. While ‘The sunk cost fallacy’ might sound like an exciting new musical act, or maybe an album title, it’s actually a really dangerous and potentially very expensive behavioural bias.
‘You’re only as good as your last performance’… not strictly true. Even if you fluffed whatever you do for a living on your last outing, that’s no reason to use it as a yardstick for your ability. Equally, if you smashed it, but had a run of average performances before that, your latest experience isn’t necessarily the best predictor of future performance.
There’s a pattern here… if you’ve been following our series on behavioural biases and how to combat them, you’ll know that for the last 15 weeks, we’ve published the latest update regular as clockwork. If you’ve opted to subscribe to emails, then once a week, every week, there’s the next instalment sitting in your inbox.
So far in our series on behavioural biases, we’ve looked at many of the ways our brains keep us on the right track in life, but derail us when it comes to our investments. It’s our brain’s job to get us from the cradle to the grave with as little damage as possible, so we’re all subject to certain instinctive behaviours that have evolved to keep us on the straight and narrow.
There’s absolutely nothing wrong with feeling upbeat about your prospects. You might win the lottery. You might get that job that seems like a bit of a stretch. You might get the crisp packet that’s hiding a tenner inside, and as long as you understand that your ‘luck’ is exactly that, no problem.
Human beings like to sort things – we like to create order, we like to know where things are. We have a built-in need to spot patterns, which is why we like to sort music into genres, pore over the season record of our favourite football team or, for those of us old enough, arrange our CDs and DVDs in alphabetical order.
Our brains are strange. They can take something as predictably consistent and harmonious as numbers and turn them into a matter of subjectivity. The way that information is communicated to us can have significant effects on the conclusions we draw.