Tag Archives: Emotion

WHY ‘LAST CHANCES’ MAKE US PANIC Fear of Regret

Posted on by under Behavioral Finance

The fear of regret can make us behave irrationally. To dodge the terrible feeling in the pits of our stomachs, we tend to act conservatively, so as not to deviate from the crowd too much.

When he/she refuses to make any decision because of the fear that the decision will turn out to be wrong and then may later lead to feelings of regret. The emotional process behind this is pretty simple. Regret causes emotional pain. Hence, the brain tries to avoid making decisions that cause regret.

Regret is an emotion, and it is also a punishment that we administer to ourselves. The fear of regret is a factor in many of the decisions that people make (“Don’t do this, you will regret it” is a common warning), and the experience of regret is familiar. Intense regret is what you experience when you can most easily imagine yourself doing something other than what you did.

Investment – Due to regret, investors keep chasing fancy and hot stocks so that they do not remain outside of the crowd from earning good returns. Also, they run for catching every available opportunity so that they do not regret missing out on an opportunity. People feel that it’s the last chance and if they do not buy right now, then they will miss an opportunity. This fear creates panic and makes them helpless to buy whatever is available.

It’s your last chance! This thought races through head, you give in and buy the last plot at an exorbitant price. The fear of regret tricked you into thinking this was a one-time offer when in reality, an opportunity will always come on the market.

Due to regret, the fund manager tries to maintain a similar kind of top holding to match the broader market return. If they are not able to match, then they feel regret for being left out.

People generally try to take profits available with their investment so that if the price falls, then they do not have any regret of not taking profits. For reducing regret, we should prepare a circle of competence and prepare an investment philosophy so that opportunity that falls outside of it can be easily avoided and help to reduce regret. We should understand that Mahendra Singh Dhoni cannot sing like Late Lata Mangeshkar. So that we should define our area of competence and outside of it never bother us.   

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

DON’T TAKE NEWS ANCHORS SERIOUSLY – Chauffeur Knowledge

Posted on by under Behavioral Finance

There are two types of knowledge. First, we have real knowledge. We see it in people who have committed a large amount of time and effort to understand a topic.

The second type is chauffeur knowledge – knowledge from people who have learned to put on a show. These people just make show that they know everything but they just speak what they have heard from the source. They speak as per the predefined script ready for them.

Any fool can know. The point is to understand. – A. Einstein




Source – Vivify

Investment – It is difficult to judge who is an expert and who has just a bird view of knowledge.

In 1998 Wesco meeting, Charlie Munger Quoted –

I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge. To me, they are like the bee dancing its incoherent dance. They are just screwing up the hive.

Mr Warren Buffett suggests us to decide what we know and stay with it, what he calls a circle of competence. Mr Munger suggests that the size of the circle is not important but important is, we stay within its limit well. If we do not know anything, we should simply say we don’t know rather act as an expert. I also faced such problems during the initial days of my career. I considered people with Chauffeur knowledge as an expert until I do not meet real experts.

In the stock market, we meet many people who act as an expert but the majority of them not. We have to carefully check their knowledge before trust on them. We have to understand their investment philosophy and process before making a judgement of them. True experts recognize the limits of what they know and what they do not know. If they find themselves outside their circle of competence, they keep quiet or simply say, ‘I don’t know.’ We also have to perform the same for becoming an expert in our field.

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

Overconfidence – 2

Posted on by under Behavioral Finance

The Illusion of Validity

Subjective confidence in a judgment is not a reasoned evaluation of the probability that this judgment is correct. Confidence is a feeling, which reflects the coherence of the information and the cognitive ease of processing it. It is wise to take admissions of uncertainty seriously, but declarations of high confidence mainly tell you that an individual has constructed a coherent story in his mind, not necessarily that the story is true.

Business – When the business personal preparing blueprint for a particular project and the narrative of the project seems good then he starts believing that this project is very good. Thus, they have to execute that project. But this confidence can turn out as overconfidence.

Investment – When we study a particular company and its narrative looks so good then we start getting confidence in the future performance of the company. But this confidence has created a story in our mind and that does not necessarily to be proven as true so that we also should work on writing down what can kill this idea. This helps us to make wise and rational decision.

The Illusion of Stock-Picking Skill

What made one person buy and the other sell? What did the sellers think they knew that the buyers did not?

Buyers think the price will increase and sellers think that price will fall.

Individual investors try to react to each news but institutions are selected about the reaction on the news which also proves their label of Smart money.

The majority of people have an illusion of skills. The majority of people believes that picking stocks and getting a return on them is mostly responsible for their skills and does not appreciate the role of luck.

But it is not the ultimate truth. There is a role of luck that should be appreciated. Not believing the role of luck will lead to overconfidence in their skill. And that will tend to make any irrational decision. So that after buying or selling, we will think that stock price will move as per our expectation because we have completed with all necessary study and confident about movement.  

We should always think that the seller/buyer has much more insights than us which make him selling/buying a particular stock. This thought process helps us with widening our thoughts process.

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