Philosopher Ludwig Wittgenstein once said that nothing is as difficult for people as not deceiving themselves. While most self-delusions are relatively costless, those relating to investment can come with a hefty price tag.
We delude ourselves for a number of reasons, but one of the principal causes is a need to protect our own ego. So we look for external evidence that supports the myths we hold about ourselves and we dismiss those facts that are incompatible.
Psychologists call this “confirmation bias,” a tendency to select facts that suit our own internal beliefs. A related ingrained tendency, known as “hindsight bias,” involves seeing everything as obvious and predictable after the fact. These biases, or ways of protecting our egos from reality, are evident among many investors every day and are often encouraged by the media. Here are seven common manifestations of how investors fool themselves:
This is by no means an exhaustive list. In fact, the capacity for human beings to delude themselves in the world of investment is never-ending.
But overcoming self-deception is not impossible. It just starts with recognizing that, as humans, we are not wired for disciplined investing. We will always find one way or another of rationalizing an emotional reaction to market events.
But that’s why even experienced investors engage advisors who know them, and who understand their circumstances, risk appetites and longterm goals. The role of that advisor is to listen to and acknowledge our very human fears, while keeping us in the plans we committed to at our most lucid and logical.
We will always try to fool ourselves. But to quote a piece of folk wisdom, the essence of self-discipline is to do the important thing rather than the urgent thing.
Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from UC Berkeley. Contact him at firstname.lastname@example.org.