The desire to earn more, the fear of missing opportunities, the personality trait of comparing oneself to others, the influence of the group, and the dream of successful investment—these factors are almost universally present. Therefore, they have a profound collective influence on most investors and the market, resulting in errors that are frequent, widespread, and repeatable.
Seven Mindsets Leading to Erroneous Decisions
Many people possess enough talent to analyze data, but few can deeply observe things and withstand the powerful influence of the psychological aspect. In other words, many people will reach similar conclusions based on their own analysis, but due to different psychological influences, they will take drastically different actions based on those conclusions. The biggest investment bias does not come from information or analysis, but from mindset.
Greed
Greed is defined as “excessive or exhaustive desire, and usually a reprehensible possessiveness, especially regarding wealth or profit.”
Greed is an extremely powerful force. Its power is so great that it can override common sense, risk aversion, caution, logic, the memory of past painful lessons, determination, panic, and other elements that allow investors to avoid trouble. Furthermore, greed occasionally causes investors to join the crowd chasing profits, only to pay the price later.
Fear
Fear, just like greed, means excess. Therefore, fear is more like panic. Fear is an excessive worry that causes investors to remain inactive when they should be taking positive action.
Self-Deception
Nothing is easier than self-deception, because everyone, as long as they wish it, will believe it is true. Investors are always looking for a panacea, calling it the “Holy Grail” or “free lunch,” but everyone wants a ticket that turns them into a wealthy person without taking risks. Few question whether this ticket exists, or why they should receive it. Most importantly, the average person always holds onto hope.
What factors make people believe in a panacea?
- First, there is usually a factual basis.
- Next, a set of seemingly intelligent theories is fabricated, which believers promote everywhere to convince others. Subsequently, this theory accidentally generates profits, either because the theory has some value or simply because new believers join to buy and push up the price of the target asset. Finally, it appears that there is truly a way to gain wealth, and this creates a craze.
Conformity (Herd Mentality)
Not sticking to one’s own opinion, even if the crowd’s view is obviously absurd. Time and again, the pressure of conformity and the desire to get rich cause people to abandon independent judgment and skepticism, suppressing their innate risk-averse mindset to believe in unreasonable things. Since this situation occurs so regularly, something must be at work, rather than a random influence.
Envy
Even if the power of greed is negative, it at least always motivates people to strive for more profit. But the negative influence of comparing oneself to others is even stronger. This is what we consider the most dangerous characteristic of human nature.
A person who might be happy when isolated from the world feels miserable when they see others doing better. In the investment world, you will find that most investors find it difficult to sit by and watch others earn more money than them.
Hubris (Overconfidence)
Facing the following practical situations, maintaining objectivity and careful calculation is actually a huge challenge:
- We evaluate and compare short-term investment performance.
- During a bull market, making an inappropriate, even reckless, decision to increase risk often brings the best returns (and most of the time, it is a bull market).
- The best returns bring the greatest reward to oneself. When things go right, feeling smart and having others agree with it is a very pleasant thing.
In contrast, thoughtful investors work diligently, earning stable returns during a bull market and losing less than others during a bear market. They avoid high-risk behavior because they know there are many things they don’t understand, and they suppress their hubristic mindset. In my view, this is the best formula for long-term wealth creation, but it cannot satisfy the hubristic mindset in the short term. Emphasizing humility, caution, and risk control is not a glamorous path, and of course, investing shouldn’t seek glamour, but that’s what people often think.
Capitulation (Surrender Mentality)
This is an investment behavior that is consistently seen in the later stages of a cycle. Investors try their best to stick to their beliefs, but when they cannot resist economic or psychological pressure, they surrender and follow the trend. Often, asset prices are too high and continue to rise, or the price is too low and continues to fall. Eventually, these trends shake the investor’s mindset, beliefs, and determination. Others profit from the stock you refused to buy, while the stock you chose to buy hovers at a low price every day. Furthermore, the investment concept you originally thought was unsafe and unwise, as the high-priced stock continues to rise or the low-priced stock continues to fall, should make it easier to do the right thing—selling the overpriced stock and buying the underpriced stock—but investors do not do this. The tendency toward self-doubt, mixed with news of others’ success, forms a powerful force that makes investors do the wrong thing, and the longer this trend lasts, the stronger the force becomes. This is another influence factor that we must resist.