Part I covered the first ten human tendencies that rule our minds, so let's begin with understanding the rest of the human tendencies in the words of the late Charlie Munger.
11. Simple, Pain-Avoiding Psychological Denial
Have you all seen the movie Shutter Island starring Leonardo DiCaprio? That is an excellent example of this tendency. Reality is so hard to believe that we distort the facts and make it bearable. Munger gives substantial attention to this denial during addictions/dependencies. I think that a network effect kind of thing takes place. The more you distort reality, the stronger this denial gets, and the worse it gets to get out of it. In the markets, we display this tendency by creating our narrative of a stock when it's going wrong and using this false narrative to stick to the story.
12. Excessive Self-Regard Tendency
In Psychology, it's called the endowment effect. A person overestimates their skills, possessions and people they associate with. "Once owned, they suddenly become worth more to him, and he would pay if they were offered for sale to him and he didn't already own them… And all man's decisions are suddenly regarded by him as better than the case just before he made them."
This is a common tendency amongst investors(myself as well), where we overestimate our skills as a stock picker and blame everything but our lack of talent when results go wrong.
The easiest way to tackle this is to stay as objective as possible regarding our decisions.
13. Overoptimism Tendency
The best places to look for this tendency are casinos and lotteries. Excess optimism drives these businesses and leads to wild stock movements as well. Without understanding the game's odds, people display excess optimism in hopes of quick riches. How can we become wealthy if we aren't aware of the roads we choose and the dangers ahead? Understanding probability will help us understand our minimal control over the fruits of our actions and hopefully help us tame our optimism and teach us to be humble.
14. Deprival-Super Reaction Tendency
A 10-dollar loss hurts more than a 10-dollar gain. Munger gives the example of his very friendly family dog, who would turn aggressive and bite if someone tried to snatch his food from his mouth. It is foolish of a dog to harm its owner, but even humans fall prey to this tendency.
This tendency is also visible amongst traders. We hate to lose money and, hence, average down multiple times even though cutting our losses is wise. The feeling of a loss makes us commit mistakes, which ironically results in more losses.
15. Social Proof tendency
Herd behaviour mentality. It is just comfortable and assuring to be where most people are. As Peter Lynch mentions in his books, it's easier for a fund manager to lose money in IBM than stand to gain in a fast grower like La Quinta hotels, simply because who would doubt IBM? This bias is visible amongst retail investors, leading to the greater fool theory where everyone springs into the same sector/business and buys them at ridiculous prices because everyone else is making money from it.
16. Contrast-Misreaction Tendency
You go to a showroom to buy a car and buy one for 30,000 dollars. Before buying, you are asked if you wish to add a dashboard for 500 dollars, and chances are high that you will agree to get it even though it's overly expensive. This is the Contrast-Misreaction Tendency. Small mistakes add up, and the magnitude will keep increasing thanks to compounding.
Investors do a P2P analysis when buying a business; this tendency can make us compare two businesses and buy the cheaper one just because it's a 'value buy' without knowing the underlying reasons for it being sold at such a price.
'A small leak will sink great ships.'
17. Stress-Influence Tendency
It is quite a simple tendency, which talks about how extreme stress can lead to faulty decision-making. Munger talks of how light stress can help improve performance, such as examinations, but heavy stress can lead to dysfunction. I would suggest reading the last work of Pavlov, which was talked about by Munger, as the premise is very interesting but a bit too big for me to add here.
That's the end of Part II, folks! I will shortly release the final part, which will conclude all the human tendencies. I have tried to keep it short as I realized it was a bit long last time. I hope we all learn new tendencies and that we can actively avoid them in our lives. Until then, reach out to me and let me know how these biases and tendencies have affected your lives and what must be done to mitigate them!
Comentarios