Behavioral Economics and Us

Jason Zweig starts off his WSJ Moneybeat column “Investors believe the darnest things.” Turns out wealthy investors believe they can earn 8.5% return. Don’t they know the economy is growing ~2% last 5 years, bonds are returning 2%-3%, stocks are near record high Price/Earnings and less likely to grow?

More astounding ‘One in Six’ Institutional Investors believe they can earn 20%. This is despite a record of below average returns. These are not mom & pop investors like you and me.

We should not be surprised the cause of these beliefs. People avoid information that will cause them to feel or think in a way they don’t want to. Smoker avoid the Surgeon General Warning. Dieters do break down for that piece of cake.

Blogger Mr. Money Mustache says, “Yes! The politicians like to cultivate fear, jealously and entitlement because these are strong emotional triggers.” No wonder partisans of both parties cannot agree. Both are ignoring evidence disagreeing with their beliefs. However neither party has a monopoly on good ideas.

Nobody likes to look at their shrinking funds when the market has an inevitable recession. We hate to sell investments that have gone down in price because we have to acknowledge the loss. It is easier to pretend it will recover. People then give up and sell out near the bottom of the market. Then are unaware of the start of eventual recovery and miss market gains.

George Soros record of investment is outstanding. George says a large part of his success is acknowledging an idea is not working and limiting his losses.

We need to be more humble and admit there may be better ideas out there. Actively search for different opinions and let your ideas be challenged. Try to build a consensus before rushing ahead.

When planning a project, define what success will look like. Then figure how to measure the results. Lean Startups look for a minimum viable product / service to test if there is a market for it.

It is okay to be wrong and fail. How else do we learn?

See Think for Yourself for more ideas on confirmation bias