WHERE’S THE OFF SWITCH? Overthinking

Posted on by under Behavioral Finance

When we think too much, our mind left our wise emotions. Not all our emotions are irrational, some help us to process rational thought.

Overthinking makes people think that they are working on a problem, but not only does overthinking not produce solutions, but it also exacerbates the problem. All that thinking takes up time and energy individuals could spend fixing the problem.

Overthinking is less likely to take action on a possible solution, makes them more pessimistic about the future, and pretty much guarantees a bad mood. It will forcefully drop us into the depression.

It undermines your intuitive ability to solve problems. The same applies to decisions that our Stone Age ancestors faced – evaluating what was edible, who would make good friends, and whom to trust. For such purposes, we have heuristics and mental shortcuts that are superior to rational thought. With complex matters, though, such as investment decisions, sober reflection is indispensable. Evolution has not equipped us for such considerations, so logic trumps intuition.

Investment – we all know that the stock market moves in a cycle. So, when we have invested during the worst time, we have reaped juicy fruits. Overthinking stop us from making wise decision. When the worst arrives, our overthinking inspires us to find out worst can happen from here and we do not think rationally that the cycle can move from worst to great and great to worst.

This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

WHY NEW YEAR’S RESOLUTIONS DON’T WORK Procrastination

Posted on by under Behavioral Finance

Procrastination is the tendency to delay unpleasant but important acts: the arduous trek to the gym, switching to a cheaper insurance policy, and writing thank-you letters. Even New Year’s resolutions won’t help you here.

When we keep self-control, it uses our Willpower, and willpower to get depleted over some time so that after using lots of willpower, it will become difficult for us to perform a mental task that requires huge mental efforts. We have to keep saving ourselves from energy-drained distractions so that we can put proper effort into the necessary things.

“While we waste our time hesitating and postponing, life is slipping away.” – Seneca

A lot of the time we hear the excuse that people often love leaving things to the last minute. They justify their actions by claiming that they are most productive under pressure.

However, scientific studies show that the opposite is true. Putting things off until the very last moment creates fertile ground for stress, guilt, and ineffectiveness.

Investment – When we have made an investment philosophy, it will become difficult to follow. Because when outside of our philosophy stocks keeps generating returns then it uses our willpower to keep self-control. And when we need to deal with stocks that fall under our philosophy, we are not able to make efforts.

The good news is: to achieve this, all you need to do is refill your blood sugar and kick back and relax. We can refill willpower through good sleep, and by doing things that we like.

This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

WHY YOU TAKE ON TOO MUCH Planning Fallacy

Posted on by under Behavioral Finance

Even though you realize that most of your previous endeavors were overly optimistic, you believe in all seriousness that, today, the same workload – or more – is eminently doable. Daniel Kahneman calls this the planning fallacy.

We generally overestimate our capabilities so that we think that we can perform lots of work in a stipulated time frame. This fallacy leads to being liberal with a time target, and cost budget to fulfill projects in organizations. But later on, this will need to revise further. Sometimes, constant planning keeps us away from thinking about any unexpected events to occur. We need to spare good time for thinking about the occurrence of an unexpected event.

Business – When forecasting the outcomes of risky projects, executives too easily fall victim to the planning fallacy. In its grip, they make decisions based on delusional optimism rather than on a rational weighting of gains, losses, and probabilities. They overestimate benefits and underestimate costs. They spin scenarios of success while overlooking the potential for mistakes and miscalculations. As a result, they pursue initiatives that are unlikely to come in on budget or on time or to deliver the expected returns—or even to be completed.

Investment – Similar happens while we plan our investment journey, we overestimate the results of what we have planned and ignore the costs, and uncertainty associated with it. When we plan an investment, we think that the investment will perform similarly to what we planned. But we forget that there can be a black swan event which can hurt our planning. So that we should not close our eyes from occurring of black swan events while making planning.

This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

BUILD YOUR OWN CASTLE Envy

Posted on by under Behavioral Finance

Many things spark envy: ownership, status, health, youth, talent, popularity, and beauty. It is often confused with jealousy because the physical reactions are identical. The difference: the subject of envy is a thing (status, money, health, etc.). The subject of jealousy is the behavior of a third person. Envy needs two people. Jealousy, on the other hand, requires three: Peter is jealous of Sam because the beautiful girl next door rings him instead.

Business – when the product of any company meets success then peers feel envy which leads to a faulty decision. The faulty decision will lead to financial disturbance.

Investment – When our fellow investor has able to earn good returns that will make us envious of his success. This put us under pressure and we ended up doing some nonsense things which will result in wealth destruction.

How do you curb envy? First, stop comparing yourself to others. Second, find your ‘circle of competence’ and fill it on your own. Create a niche where you are the best. It doesn’t matter how small your area of mastery is. The main thing is that you are the king of your castle. By looking at other castles, people generally burn their own normal homes. So be careful with decisions and emotions getting born due to envy.

This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.