From a Harvard Business Review Article:
Researchers have identified a whole series of such flaws in the way we think in making decisions. Some, like the heuristic for clarity, are sensory misperceptions. Others take the form of biases. Others appear simply as irrational anomalies in our thinking. What makes all these traps so dangerous is their invisibility. Because they are hardwired into our thinking process, we fail to recognize them—even as we fall right into them.
At times like the present, we are at an extreme disadvantage. We have fear paralysis; recency bias (markets skydiving); and are inundated with information about market volatility, and layoffs, business shutdowns, tragedy and so on. Headlines like this don’t help either:
The Coronavirus Crisis Could Wipe Out Entire Industries.
Humans have difficulty dealing with too much data. Some simply have a tough time making the decision in the first place. During the Cuban missile crisis, Canada’s Prime Minister John Diefenbaker just couldn’t decide whether to put Canada’s military on high alert along with the U.S., much to the frustration of his Minister of Defense (not to mention his ally President Kennedy). Anxiety can prevent us from making smart decisions.
Mixed messages abound – we know many stocks are cheaper (if not a bargain) and investors clamored to buy them at prices nearly 100% higher than they are now. (If a stock fell by 50%, the old price is now 100% higher). If you saw this sort of discount for a product you wanted – you’d waste no time buying it. It’s unlikely you’d tell yourself: “Gee, if I wait it might get cheaper.” More probably, you’d tell yourself: “If I wait, the price will be marked up again and I’ll be s&%t out of luck.” Another flaw in our thinking is how irrational we are about money-related decisions especially when it comes to investing.
Over decades I’ve been asked for advice (which is largely ignored of course), and here are some tips that any experienced money manager will tell you:
- Shut off your emotions when making money-related decisions. Be rational.
- You will NOT be able to jump in at the RIGHT time. As stock prices recover, you’ll constantly tell yourself: “I should’ve bought back then, so I’ll wait until prices come back down.” They won’t.
- Do the opposite!
For those suffering from clinical depression and anxiety, the most effective therapy is forcing oneself to do what you don’t want to do. It works especially well when it comes to managing money. The video below is not an ad – it’s George on Seinfeld ‘doing the opposite.’