Seeking Wisdom: A Look At Emotion & Decision Making
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
One of the Most Valuable Lessons You Can Learn as an Investor
I usually wait until I’ve read the entire book before I write a review, but in the case of Seeking Wisdom, a book written by Peter Bevelin, the first five chapters describe what is, in my opinion, one of the most important concepts any current or soon-to-be investor can learn. Considering this, I decided to write a preliminary review to share Bevelin’s take on emotion and decision making, and how this relates to investing.
Allowing Emotion to Drive Investment Decisions – My Experience
The worst investment decisions I’ve made were rooted in emotion. I’ve taken heavy losses because I failed to challenge my original beliefs and have hung onto a stock for too long, or bought a stock based on a ‘hot tip’ from someone whom I thought was ‘in the know.’
In retrospect, I’m glad that I can recognize and admit where I went wrong, and I’m sure as heck going to make a concerted effort to minimize the role emotion plays in my investment decision making in the future.
In Seeking Wisdom, Bevelin explores what influences our thinking, the psychology of misjudgements and the physics and mathematics of misjudgements. I think this information is the single most important piece of investing advice that a person can learn. People can be lucky or confuse a bull market with brains, but having this type of awareness and knowledge can help position you for success in any situation that the market presents.
Wise Advice from One of the World’s Most Successful
“I would say if Charlie (Munger) and I have any advantage it’s not that we are smarter, it is because we are more rational. We don’t let other people’s opinions interfere with our thoughts…we get fearful when others are greedy and we try and get greedy when others are fearful.”
~Warren Buffet (Seeking Wisdom, 35)
If you want to succeed in the investment world – and I’m sure you do – Buffet’s words are ones to remember. The crowd is influenced by emotion, so by doing the opposite, you’re giving yourself a margin of safety that will set you up for potentially life-changing returns – especially in the junior market.
Reasons for Misjudgements
Understanding the psychological tendencies or biases that influence us subconsciously is vital for learning how to overcome them. I’ve selected the biases that I believe are most applicable to investing, as described by Bevelin:
• Bias from mere association – seeing situations as identical because they seem similar
• Self-serving bias – overly positive view of our abilities, being overly optimistic
• Bias from consistency tendency – being consistent with our prior commitments and ideas even when acting against our best interest or in the face of disconfirming evidence
• Impatience – valuing the present above the future
• Bias from over-influence by social proof – imitating the behaviour of many others. Crowd folly.
• Emotional arousal – making hasty judgements under the influence of intense emotion
~ Peter Bevelin (Seeking Wisdom, 39)
These are just a few of the 28 biases that Bevelin discusses. Read them carefully and try to understand how they play a role in the misjudgements people make in life and in investing. Think back to some of the situations where the decisions you’ve made have led to less than stellar results, or maybe even big losses.
“Am I Wrong?”
This is a question you need to ask yourself constantly, whether it’s about a macro trend in the market or about a company in which you’re invested. Becoming emotionally invested in our position can blind us from seeing the truth.
“Often we prefer to hear supporting reasons for our beliefs; think ourselves as more talented than others, and make the best of bad situations” (Seeking Wisdom, 17).
On numerous occasions, I’ve found myself looking for confirmation or evidence that supports what I feel is the right choice, and felt amazing when someone agrees with me, whether it’s the author of a newsletter, a famous broker or colleague. That said, I’ve also shunned the opposing position prematurely, disregarding valid points and theses only because they didn’t align with what I felt to be true. In retrospect , the opposing position is exactly where I need to start; who better to highlight the potential downfalls or unanswered questions of a company or a trend?
This may seem like a hard thing to put into practice, because an opposing position shakes your confidence and can make you question your ability to thoroughly analyze a situation. But it shouldn’t. Instead, we should look to opposing positions to give us the whole picture, or a way to see the story from both sides of the fence.
Quotations to Consider
“Behaviour that is rewarded on an unpredictable basis has the highest rate of response and is the most difficult to extinguish. For example, this is how gamblers are rewarded” (Peter Bevelin, 44).
“A few accidental connections between a ritual and favourable consequence suffice to set up and maintain the behaviour in spite of many non-reinforced instances” (B.F. Skinner, Superstition in the Pigeon, Journal of Experimental Psychology, 38, 1948).
“We deny and distort reality to feel more comfortable, especially when reality threatens our self interest” (Peter Bevelin, 59).
“We put a higher value on the things that we already own…This is why many companies offer money-back guarantees on their products” (Peter Bevelin, 68).
Ain’t No Room for Emotion in Investing
Emotion has no place in the investing decisions that we make. We need to make decisions based on facts, not HYPE!
I’m really looking forward to reading the second half of this book and to seeing what other valuable information I can glean. Whether you’ve been investing for some time and have done your fair share of emotion-filled decision making, or you’re just starting to wet your feet in the market, do yourself a favour and pick up a copy of this book. In my opinion, what Bevelin describes is one of the most important lessons you can learn, when it comes to investing.
Until next time,