18 Jan Behavioural Investing

Ability to use self control to force our cognitive process to override our emotional reaction is limited. Each effort at self control reduces the amount available for subsequent self control efforts. We are hard wired to focus on the short term. Real pain and social pain felt in exactly the same places in the brain. Contrarian strategies are investment equivalent of seeking social pain.

Over-optimism: Illusion of control (people’s belief that they have influence over the outcome of an uncontrollable event)

Overconfidence: Illusion of knowledge (tendency for people to believe that the accuracy of their forecasts increases with more information)

When people see information in an format with which they are familiar with, they will dumbly process it. Hence the survival of the noise peddlers in financial markets. Investors faced with chronic uncertainty will turn to any vaguely plausible explanation and seek to find such explanations.

Confirmatory bias: We form our views and spend time searching for information that agrees with our views.

Investment strategies that don’t need forecasts as inputs are: 1) Value strategies based on trailing earnings. 2) Momentum strategies based on past prices

Why still forecasting? 1) Ignorance (not knowing that their overconfidence exists). 2) Arrogance (ego defence mechanism)