Investing and Human Psychology
If I had invested x amount in y product z years ago, I will be q richer today
A common phrase I hear among novice retail investors in the equity markets is “If I had invested a pounds into b product c years ago, I would have made p pounds in profit in q time”. This statement above is quite misguided. I intend to elaborate why below.
Firstly, there is this human behaviour that psychologist call Hindsight Bias that can distort how some of us view the stock market. Once we learn what did happen, we go back and believe that we knew all along what was going to happen. Hindsight Bias removes surprises in our world for which the human brain is thankful for. This is due to the human brain liking certainty; That’s why the brain thrives on patterns with Hindsight Bias giving us the illusion of certainty. Our conscious mind must become aware of it if we are to become better investors.
Secondly, there are a group of so called “expert investors” who like to sell courses on how to make money in the equity market place. They like to sell certainty to the unsuspecting audience; that if they - the audience - invest y pounds in the stock market, they will receive z pounds. The only certainty these so called experts have is that a certain number of people who receive these sales pitches to buy their books will buy their books as long as they appeal to the human behaviour quirks: Greed to profit from doing no work and Prone to believing narratives that release feel good chemicals in the body.
Finally, it gives one the illusion that there are magic stocks that one must pick to invest in. That by picking these magic stocks, one can generate alpha with certainty. Real life is messy, full of permutations and combinations. Unless you have been living in a zero entropy space, you must have realised that real life is like poker not chess.
In conclusion, investing is a highly skilled game. It’s important to either put in the time and learn how to invest or hire a qualified financial investor.
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Great article. Welldone👊👊👊
Hindsight and rear-view 20-20 vision! The bane of most things human. Always easier to recall where we would have made gains and ignore our potential losses! The calculated approach will be to have a dummy track of ALL the market plays one would have considered and compare with your actual plays in the market. Easy to do this as most platforms offer a dummy account so one can trace your actual plays with the proposed but ignored ones. The dummy account thus serves as a blind to hindsight bias. Over time, one can determine if their gut feeling should be followed, or left to its intestinal meandering!