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.
#knowledge
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.
We often say hindsight is 20/20 – looking back, it was perfectly clear all along. It’s often an expression of regret – we should have done X when in fact we did Y and now look what’s happened.
As Monty Python’s eponymous hero of ‘The Life of Brian’ once famously declared ‘You are all individuals’. We’d certainly like to think we are – from our choice of clothes, our holiday destinations or the cars we drive, right through to whether we’re a flat white person or more of the macchiato type.
As Pulitzer Prize-winning journalist Mary Schmich famously said, “Whatever you do, don’t congratulate yourself too much, or berate yourself either. Your choices are half chance. So are everybody else’s.”
Seeing the whole picture is something we’re frequently advised to do, in finance and other walks of life. It’s important to step back and look at the full picture – the problem is that our advanced human brains are often doing just the opposite of that.
The human psyche is full of little quirks – strange behaviours that we can’t always account for and in some cases we aren’t even aware of. They’re not just nature’s little jokes though, very often we display hard-wired behaviours that evolution has put in place for good reason, to help us out of situations that we wouldn’t consciously react to quickly enough.
Investment is a long-term pursuit – it’s about setting out a plan, devising a strategy and then sticking to it. We know that past performance doesn’t guarantee future returns and we accept there’ll be ups and downs along the way. But in the long run, a well-planned and executed investment approach stands to help us grow our money.