Investing Behaviour

How to Become a Successful Investor? Grandma Knows Best

The way we conduct ourselves in real life has a lot to do with what we’ve learnt from our parents, and especially from our grandparents.

In fact, the best memories I have of my childhood are of the nights spent with my grandmother who told me stories of the kings and witches, of what made people good and what made them bad, of the importance of forming good habits and the harmful effects of walking the wrong path.

You must have had the same experience.

Anyways, why I’m telling you all this is to show how our influencers change when we are dealing with our real lives, and when we are dealing with our stock market investments.

See this…

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This is How Media Adds Fuel to Panic

Here is a snapshot of the home page of today’s Economic Times.

It’s good that the newspaper is updating people – minute by minute – on the latest on the global crisis. But it is images/pages like these that add to people’s panic.
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So You Want to Be the Next Warren Buffett?

Many investment experts and financial websites make outrageous promises of untold riches to their readers and clients.

‘Become the next Warren Buffett’, some would promise. And then there are others who would suggest – ‘How you can get rich like Warren Buffett‘.

If you have also come across such promises or claims, and have started to believe that you or your kid can really become the next Warren Buffett, see this..

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The Sure-Shot Way to Become a Successful Investor

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Your Brain on Stocks

The brain we have on the top of our head isn’t a flawless machine.

It is definitely powerful and comes in an easy to carry container. But it has its weaknesses.

In everyday terms, we call such weaknesses as ‘biases’. The good part is that while we cannot exchange our brains with other people nor can we upgrade it at a hardware shop, we can avoid mistakes that our biases cause by just taking notice of them.
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The Folly of Prediction (Freakonomics)

“It’s impossible to predict the future, but humans can’t help themselves. From the economy to the presidency to the Super Bowl, educated and intelligent people promise insight and repeatedly fail by wide margins. These mistakes and misses go unpunished, both publicly and in our brain, which has become trained to ignore the record of those who make them. In this hour of Freakonomics Radio, we’ll dream of the day when bad predictors pay.”

Listen to the radio here: [audio:https://www.podtrac.com/pts/redirect.mp3/audio.wnyc.org/freakonomics_specials/freakonomics_specials060411.mp3]

Do You Suffer from Prediction Addiction?

“Just as nature abhors a vacuum, people hate randomness. The human compulsion to make predictions about the unpredictable originates in the dopamine centers of the reflexive brain. I call this human tendency ‘the predication addition’.”

This is how Jason Zweig describes the human tendency to predict in his book Your Money and Your Brain.

So do you suffer from prediction addiction?
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‘Sunk cost’ madness on a massive scale

We learnt yesterday how the sunk cost fallacy leads investors to throw good money after bad.

Well, here’s what I read in a leading business daily that talks about the impending financial crisis in the western world:

“An apocalyptic Lehman-style moment seems unlikely right now, because US legislators will likely come to some sort of a deal that will allow the federal government to resume borrowing, while Europe has invested too much in the integration project to let things collapse in the first episode of stress.”

Note the words – “invested too much…to let things collapse”.

Now, this is a case of ‘sunk cost fallacy’ on a massive scale.

Pity the poor taxpayer!

What’s Your 12-month Target for the Sensex?

Have you ever wondered why the anchors and the stock market experts on business channels make so many predictions day in and day out? And why they are so happy to make these predictions?

Or what gives you a natural high while predicting the future of the stock markets, or stocks you hold or are about to buy?

Neuroscientists lay the blame on ‘dopamine’ – a chemical in our brains that helps us figure out how to take actions that will result in rewards at the right time.

It’s the release of dopamine in our brains that gives us that high to make the next prediction, and the next one.

It gives us the pleasure of expecting our predictions to turn out true in the future. Like the pleasure you’d derive from predicting the Sensex over the next 12 months, and also expecting your call to turn out true!
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Are You An Overconfident Investor?

If yes, you will relate to this chart. If not, this is what overconfidence will do to you.

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