03 December 2020
As we welcome relatives into our homes this Christmas, we won’t be able to hug or kiss them. How difficult is that going to be? As they walk in the door the temptation to hug will be pretty difficult to resist. If they stay for a few days it will be nigh on impossible. Why can’t we just follow the rules, we know they make sense. A hug could kill, but it won’t, will it?
We don’t follow the rules because as humans we are almost always overconfident. We are built to overestimate our own skills and chances of success. Overconfidence in decision making is innate to all of us, but more prevalent in those who think they know more than others. Donald Trump or Dominic Cummings spring to mind? The entire approach of the UK government? From a survey, 84% of Frenchmen thought they were better than average lovers…
Those who think they know more than others have fallen prey to what is called the “illusion of knowledge”. As humans we do not like uncertainty, so we collect information. Think of what you have done to understand Covid-19 and its impact! The result is we think we are better informed and that we know better than others. We act on this information with overconfidence!!
Investors in the stock market fall prey to that illusion of knowledge time and time again. Surely to invest you need to know what is going on. But if you think you know what is going on you fall into the psychology of overconfidence. Speaking to the management must give you an insight? Pouring over annual reports must give you an advantage? Not so if you become overconfident.
As an investor you have to have a toolbox to guard against confidence. At MVAM, it might not surprise regular readers to know we have a saying for this. “What an analyst doesn’t know will kill you!” Or to put it another way – there is always something that is happening in this world that you do not know about, which could wreck your certain investment winner.
For those of you looking to pick an investment manager to run your money find the ones that admit they made good profits on an investment for totally different reasons as to why they invested in the first place. Or ones that readily concede that they get things wrong. Investment management offices devoid of crystal balls is a good place to start!!
These tools that we use to avoid our ingrained mental pitfalls must all be sharpened this Christmas. We must remind ourselves as we meet our friends or relatives that it does not always happen to someone else – over confidence if ever there was. But also, if the turkey dinner just ends up being average rather than superb don’t be too hard on yourself either. Average is fine. In a world of 8 billion we are all pretty much in that category whether we believe it or not!!
So, to all our clients and other newsletter readers we wish you the best possible, Covid free, Christmas. And yes, we too, find it quite impossible to believe that some readers of this way above