Investing in Difficult Times # 2
By Coen Welsh – In my previous article I explored some behaviours that may impact the net effect of your investment and could potentially influence the overall value of your investments/savings when al is said and done. To summarise the points I made in the previous article. 1.) There is a difference in the total investment value that our investments could achieve and what we end up getting. This is called the behaviour gap and is described as the counter productive activities we engage in that cause our investments to flounder. 2.) Delayed gratification and impulse control. The second thing I discussed in my previous article was the skill we need to learn to not gratify each desire immediately. By not spending on a new phone, clothing or car, we may eventually end up with more. 3.) Lastly, I discussed the overinflated self confidence we have when we invest. Most people believe they can beat the market. Some might get lucky, but most people end up with less than what they should have because of unnecessary risks taken because of our ego.
Moving on, the second batch of psychological concepts related to investing that I would like to explore starts with selective memory. We often tell others that they are guilty of having selective memories. This means that they want to only remember the good and forget the bad. This may sound as an insult, but it is in fact a survival mechanism. We tend to only remember the good decisions we made and the good that happened to us. Dwelling on the negative and the poor decisions we made may cause us to become depressed and overly critical. Similarly when we invest we tend to only remember the good investments and decisions. This happens because our nature is to protect our self concept. We tend to see things and actions that confirm what we believe of ourselves. Take for example when you tell a joke. Let’s assume for the sake of this illustration that you believe that you have a good sense of humour. Now when you tell the joke and nobody laughs what happens next. We almost automatically start blaming the audience. We say things like “They don’t get it” or “They don’t have a sense of humour”. There are very few people who would stop and think that maybe it is the joke or the joketeller (yourself) who doesn’t have a good sense of humour. We tend to then discard the negative information because it does not correlate with our own self concept.
When we experience something that counters our own perception of ourselves we are faced with something we call cognitive dissonance. Cognitive dissonance is described as the feeling you get when you hold two or more contradictory beliefs or values. In other words, you believe that you are a good investor but your investment results don’t reflect that. In order to rectify the cognitive dissonance you have two options. You either need to change your behavior or your thinking. Practically you either need to then start making some good investments to “prove” that you are a good investor. Alternatively, and this is the much harder option, you need to change your opinion to reflect the reality. This means that you may need to face the fact that you are not Warren Buffet, but just a mere mortal.
The challenge is that most people go for the first option. They start to make even worse decisions and lose even more and then in an attempt to eliminate the discomfort that comes with the cognitive dissonance they start blaming everything and everyone else for their failure. They blame the economy, the government and everything in between. To conclude, when you do your investing, look carefully at your whole history of investments. Do not just look at the good ones, but the not so good and the outright bad ones too to determine your overall success. Secondly, do not attempt to reinforce your self concept through your investment planning. This is the one area in your life where ego should not play a role. Look at everything logically and maybe even get an outsider to give you an objective opinion. Through these outside opinions you can then build an accurate self concept and invest accordingly.
Disclaimer – I am not a Financial Advisor and the information contained in this article is not financial advice and should not be seen as such. I am an entrepreneur and investor who tries to play the game and make the most of our time here while trying to leave a better place when my time is up.
Coen Welsh, a qualified industrial psychologist is an expert on the Antecedents and underlying Psychological Conditions predicting Employee Engagement.He has worked in diverse teams in the UK, Egypt and Namibia. Coen regularly gets invited to speak at HR and other conferences. He is a regular contributor to NBC National Radio as well as Tupopyeni and Off-the-Hook on NBC Television. He is a founding member of the Professional Speakers Association of Namibia. You can visit him at www.coenwelsh.com or at www.capacitytrust.com.