Probabilities are at the heart of investing. We look at examples of our human frailties in assessing probabilities.
Risk aversion is an unwillingness to take on a risk in spite of the fact that the reward amply justifies the risk taken
If you don’t know what framing is, it’s a wonder you survived this long. We can defend against misframing when others use it against us. But, as important, we can learn to be alert to our own lack of perspective and reframe our own view of things to our advantage.
In our hunt for the investment guru we get hit with a double whammy of cognitive errors. We see patterns in random data because we, as humans, love to find causes and patterns suggest causes. And, we jump to conclusions on the basis of statistically insignificant data, again, because we love to identify causes.
The greatest failing of most investors, both professional money managers and individual investors, is a failure to understand the impact of their own very human behavior and that of stock market participants as a whole.
Investors always need to be alert for things that make us risk seeking. Risk seeking is bad. Risk seeking is being willing to take a risk even if the chances of success are poor. Risk seeking causes investors to lose money.
When we own a stock, let’s face it, we love to see articles and reports that confirm our positive view of our investment. It’s human nature. It makes us feel good. On the flip side, we tend not to see or notice negative opinions.
We need to have full confidence in our judgement about a company if we are to make a serious financial commitment to it. But, the strength of our belief that we are right has nothing to do with the validity of our judgement. And, if that sounds weird, blame in on behavioral psychology.