Investing in Difficult Times # 4
By Coen Welsh – So far, in the articles I have written here, we have discussed the variety of behaviours and psychological concepts that affect our investments. The investment strategy we follow depends on our ability to make decisions in an environment where we often can not predict the outcome. In fact, the outcome tends to be rather unclear.
We therefore need to make investment decisions based on a philosophy rather than fact. An investment philosophy can be defined as a set of rules and principles that guide and shape your decision-making process, however as human beings we need to still strive against our own emotions and biases. In the articles I wrote prior to this one, I discussed such things as loss aversion, cognitive dissonance and delayed gratification. In this article, I want to conclude this series with one last piece of psychological trickery that causes us to make poor decisions.
This last piece of advice is something we called confirmation bias. Confirmation bias happens when we look for things to confirm with we already know about ourselves and about the world we live in. For example, if you believe that property is a good investment you will tend to overlook information that is contrary to that idea.
This will cause you to not to notice all the negative information relating to property such as the costs to renovate, body corporate levies and general wear and tear caused by tenants. This is in addition to not recognising the risk of tenants not paying their rent.
Your focus on the other hand, will be on capital gains, rental income and such indicators. If this is not clear, allow me use a practical example of confirmation bias to explain this concept.
I once had many Samsung devices. A Samsung laptop, a Samsung phone, Samsung microwave, a Samsung TV etc. At that point in my life I was looking at buying a surround-sound system. Now my wife, like most women, do not want cables all over the house to connect all the surround sound speakers.
Knowing this, I approached the TV shop to look for a solution to my problem. I found a solution, but it was way outside my price range. It was a virtual surround sound system and being quite a hefty investment I decided to do research. I Googled every price checker website, every review website and every comparison website to determine whether or not this particular device was worth the money I would spend on it. Eventually I couldn’t find anything wrong with it and I went ahead and made the purchase. Not long after buying the system the built in DVD player broke.
Then in attempting to find out what is wrong I Googled it again. This is true, I entered the device name and model number and since I struggled to frame the issue I just hit enter. (The DVD player was fine, but the mechanism that lifted and inserted the DVD didn’t work so you could watch the DVD that was inserted, but you couldn’t take it out.)
Like I said, I didn’t know how to phrase all that in a Google search so I just entered Samsung and the device model number and hit enter. The very first result that came up indicated that the mechanism that ejects the DVD has some issue with it and often breaks.
That’s confirmation bias! In all my research prior to buying the device I could not find a single fault with it yet when something broke the first result I found showed a faulty DVD player. How is this possible?
Confirmation bias causes us to find information that supports our view of the world and the values that we have.
At the beginning of this article I referred to your investment philosophy. When discussing investment opportunities with other investors, I find that we tend to see information and we tend to spot trends in the market that support our beliefs and philosophy, while information that contradicts our world-view or expectation is often rejected and not given any consideration. Because of this, we then tend to make bad decisions that do not maximize our capital growth.
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.
