Why does your brain control more of your investing success than the markets do?
“Your investments can go down, as well as up.”
You’ll see that disclaimer on regulated adverts, and, if you’re like me, probably think, “Aren’t experts meant to be, well, experts?” If you’re trusting your ‘expert’ fund managers, shouldn’t they at least be able to not lose your money?
Well, kind of, markets are relatively predictable, so what’s the weakest link here? Clue: it’s not always the markets!
In his article, Barry Ritholtz (https://www.linkedin.com/in/ritholtz/) argues that successful investing is less about picking hot stocks or clever timing and far more about avoiding predictable mistakes, especially those rooted in human psychology. He emphasises that the brain, rather than the markets, is often the weakest link in a portfolio. Our cognitive wiring, developed for survival, not stocks, leads us into traps when we try to invest.
So, let’s explore that a little more, after all, that’s what this website is all about:
- Illusion Of Control: believing one’s own predictions are far more accurate than they really are – often called arogance, somewhat unfairly
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Hindsight Bias: thinking events were more predictable after the fact than they actually were – ever wondered how so many people ‘saw 2008 coming’ AFTER it came, but did nothing about it
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Confirmation Bias: seeking information that supports your existing view and ignoring contradictory evidence.
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Loss Aversion: the pain of losses looms larger than the satisfaction of equivalent gains, causing irrational retention of poor assets or panic-selling into weakness
- Sunk Cost Fallacy: when we hold on to assets that are only going to go further down, for fear of accepting minimal or (unrealistic) future gains
How do we avoid this though? There are a number of accepted strategies:
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Try to focus on what you CAN control: hoping for success but planning for failure, or balancing your portfolio is a simple, yet effective strategy
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Build a plan: and stick to it rather than chasing headlines or trying to beat the market at every turn
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Recognise your brain’s limitations: design systems (automatic investing, predetermined rules) to guard against impulsive behaviour – knowing you’re likely to make these mistakes is the first step to managing them
