Recently I heard Dr. Meir Statman speak at a Harrow Partners/University of Alberta School of Business sponsored event. He talked on “Behavioral Finance”, his area of expertise, and addressed the question "Are Investors Rational?”
I learned that we humans have a natural inclination, a passion, to analyze what is happening, to interpret it with systems and to define it with patterns. We love to find patterns. While in most fields of life this generally serves us well, it does not work well in the area of finances and investing. This is a chaotic zone and there just are very few repeatable patterns we can depend on happening consistently and that can be used to build wealth and make rationale financial investments. This concept crashes into the volume of words that are written and spoken on this topic.
If you're in the stock market, like I am, then you too have gone though the recent wealth whiplash. It wasn't fun. My emotions stack up between feeling stupid and feeling regret.
It is easy to remove the word and the concept of "regret " from text books on finance. It is impossible to remove regret from us. When an investment heads south and the losses accumulate, regret inevitably gets deposit within.
An individual has four million dollars. One year later their four million dollars has shrunk to three million dollars.
Another person has one million dollars. One year later their one million has grown to two million dollars.
Who has more wealth?
In spite of the obvious answer, the pain of loss for the first investor is greater than the joy of gain for the second investor.
Self management is huge when it comes to money we own and money we owe.
Fear keeps you out of an investment opportunity too long and greed keeps you in an investment too long. You can lose money being a pig, a bull or a bear. Buying low and selling high, market timing, is tough because of the little word that frames the window, "when."
Statman encouraged his audience to know three things.
- Know your goals.
- Know your emotions.
- Know your cognitive error.
Cognitive error to me is those conclusions I have come to that are wrong, those determinations I've made that are incorrect, those patterns and formulas I believe in that just don't work. The best surprise in life is no surprise. I never get used to financial surprises. I still don't like them. When you make your own lunch you can't blame the cook. When you do your own investing, like I've done, you can't blame the advisor. That's when being stupid really smarts.
Bonito Mussolini, who lead Italy into WWII and who died in that conflict, once said "Man's ability to believe is unbelievable."
Statman pointed out that "We are not rational. We are normal. We look for evidence that confirms our claim and our beliefs. We overlook evidence that disconfirms our claims and our beliefs. Sometimes we can be normal stupid. Sometimes we can be normal smart. Normal smart people find patterns where they exist. Normal stupid people find patterns where they do not exist."
Know yourself - make yourself your ally.
Assure yourself - make science your ally.
Protect yourself - make your financial advisor your ally.
Normal stupid or normal smart. I'm going for the last option.
My son Marshall reminds me: "You can't fix stupid."
I'll need to spend the rest of my life working at being "normal smart".
FIVE ACTION AND TRACTION QUESTIONS FROM COACH LORNE
What is one life zone you deliberately, intentionally choose today to be "normal smart" in?
List ten things you can do right now to make this happen.
Who do you know that would love to help you be normal smart?
So when are you going to do something about it? (You do or you don't. There's no such thing as you'll try.)
Who will know if you do and will cheer you on or will know if you don't and will ask you why? (Who is going to energize the process by holding you accountable?)