Dear Investor, That Cocky Voice in Your Head Is Wrong

Posted by jasonzweig on Aug 27, 2018 in Articles & Advice, Blog, Columns, Featured |

Image Credit: Hanna Barczyk

By Jason Zweig | Aug. 24, 2018 7:00 a.m. ET

As much as all of us investors wish we were perfectly logical calculating machines, we are human: emotional, distractible, impatient, inconsistent. Behavioral economics is the study of how real human beings—not the walking, talking spreadsheets that traditional economists pretend we are—make financial decisions. Unfortunately, it’s all too easy to persuade yourself that the findings of behavioral economics apply to everyone else but you. After more than 20 years of studying research in that field, here’s how I think most investors interpret it. How many of these sound like you? I know many of them sound like me.

• Behavioral economics teaches that people are overconfident: They believe they know more than they do, or they assume their knowledge is more precise than it is.

I’m 100% certain that’s true for everybody else, but there’s no way that applies to me.…

To read the rest of the column:

The Wall Street Journal, https://www.wsj.com/articles/dear-investor-that-cocky-voice-in-your-head-is-wrong-1535108459

Note: In my own head, I titled this column “The Behavioral Economics of Being Me.” I first started playing with these notions in a set of tweets I posted a few years ago, which you can find here:

Behavioral economics says humans are overconfident. I’m 100% certain that’s true for everybody else; me, I’m not so sure about.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

Behavioral economists say people are bad at estimating probabilities. Haven’t they ever noticed somebody wins Powerball almost every week?

— Jason Zweig (@jasonzweigwsj) October 27, 2015

When I look back, I see myself committing hindsight bias all the time.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

I showed a lot of recency bias in the past few days, but not so much before that. So I don’t think I’ll be making that mistake again.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

Behavioral economics says ~80% of people are prone to anchoring. That sounds high to me; 75% to 78% seems about right.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

Confirmation bias says people tune out evidence that they might be wrong. That’s so ridiculous I’m not even going to bother disproving it.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

I’ve read lots of research on unconscious bias, but I can’t think of a single decision where I ever could possibly have been prone to it.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

Behavioral economics says people are too optimistic. Ha! Just you wait till Facebook buys my great new scratch-n-sniff app for $10 billion.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

The disposition effect says investors hold their winners and hate to sell losers. Well, I don’t suffer from that. I don’t have any losers.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

Behavioral economics says people are impatient and myopic. I could explain that to you, but I gotta run.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

Behavioral economists say people are prone to status-quo bias. But all my investments are already perfect. Why would I want to change?

— Jason Zweig (@jasonzweigwsj) October 27, 2015

Behavioral economists say you should use base rates to make your decisions. But my way works, like, almost all the time, pretty much.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

Of course I ignore sunk costs. I'll prove it to you after I finish the Ph.D dissertation I've been working on since 1982. I'm almost done.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

Behavioral economists say people overreact to fluctuations in the stock market. That's nonsen–WHAT DO YOU MEAN, THE DOW IS DOWN 150 POINTS?

— Jason Zweig (@jasonzweigwsj) October 27, 2015

Behavioral economists say people rely too much on small data samples. Well, I know at least 3 people who'd never do that: me, myself and I.

— Jason Zweig (@jasonzweigwsj) October 27, 2015

For further reading:

Books:

Benjamin Graham, The Intelligent Investor