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Successful investing - influence bias


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Continuing our series on how not to be your own worst enemy. This presentation looks at influence bias.

Published in: Economy & Finance, Business
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Successful investing - influence bias

  1. 1. Successful Investing “How not to be your own worst enemy”
  2. 2. Influence bias
  3. 3. Introduction 1. We want certainty 2. We want to know what we will get So: 1. We look for winners 2. We listen to experts 3. We hear what we want to hear
  4. 4. Certainty • You are ill, you go to two GPs • First doctor says “I know what this is” • Second doctor says “Not sure what this is, but have these tablets” Which one do you trust?
  5. 5. Certainty? • 90% of doctors think they diagnose correctly first time • In reality, only 20% get it right first time Now which one do you trust?
  6. 6. Certainty? • Consensus forecasts of economists have failed to predict any of the last four recessions • 94% of analysts predications for 2 years earnings projections are wrong, over 12 months 45% are wrong Which one do you trust?
  7. 7. Harmful investor behaviour Investment over 20 years Return S&P 500 Equity index 9.14% p.a. Individual investors 3.83% p.a. Data Source: Investment Company Institute, Morningstar Associates and DALBAR. 20-year Period Ended December 31, 2010
  8. 8. Harmful investor behaviour • We usually think we are above average and less likely to make mental errors • The annual Dalbal studies highlights that we are prone to buy & sell at the wrong time
  9. 9. Reality “We are our own worst enemies” – Benjamin Graham
  10. 10. The brain • Our brains have been refined by the process of evolution • Evolution occurs at a glacial pace • Designed for the environment we faced 150,000 years ago • They are potentially poorly suited to the information age we live in today
  11. 11. X & Y Brain • X Brain – the older animal brain • Y Brain – the new conscious brain
  12. 12. X & Y Brain • X Brian - the dominant part – i.e. the default emotional brain o Everything goes there first o Processes loads of information – quick and dirty ‘satisfying’ system o Confirms information is correct because it wants it to be, i.e. emotions rule the day • Y Brain o Conscious brain – but 99% of people give it back o Logical part – slow, deductive approach to problem solving o Evidence and logic are needed to make it believe something is true
  13. 13. X & Y Brain • X Brain can shut down Y Brain in times of high stress, for example if a physical threat is strong pure X • Reality both systems are needed – X only would spend all day in bed considering the options • Summary – X reacts first (i.e. emotion) and Y acts as a checker and sifter (i.e. logic)
  14. 14. X & Y Brain - summary • It takes five minutes for 5 machines to make 5 pies – how long does it take 100 machines to make 100 pies? • Lily pads on a lake – doubles ever day and full after 48 days, how many days to be half full? • Summary – X reacts first and Y acts as a checker and sifter
  15. 15. And finally • Have tendency to display traits that prevent us from doing what we know we should do: o Historically little volume transacts @ the bottom of the market, or for a time on the way back o Unless one has pre-planned and pre-committed, opportunities will be missed due to dear induced paralysis • Warren Buffett “be greedy when others are fearful and fearful when others are greedy”
  16. 16. Influence bias - summary • Our brain craves certainty, & seeks confirmative information quickly • Often emotion overrules logic, i.e. confirmative information doesn’t mean we are right • Warren Buffett said “Investing is simple but not easy” - we can learn to make better investment decisions Let’s enter the journey together…..