successful investing - influence bias
DESCRIPTION
Continuing our series on how not to be your own worst enemy. This presentation looks at influence bias.TRANSCRIPT
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Successful Investing
“How not to be your own worst enemy”
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Influence bias
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Introduction1. We want certainty
2. We want to know what we will get
So:
3. We look for winners
4. We listen to experts
5. We hear what we want to hear
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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?
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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?
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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?
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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
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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
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Reality
“We are our own worst enemies” – Benjamin Graham
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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
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X & Y Brain
• X Brain – the older animal brain
• Y Brain – the new conscious brain
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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’ systemo 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 backo Logical part – slow, deductive approach to problem solvingo Evidence and logic are needed to make it believe something is true
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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)
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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
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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”
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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…..