“Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog” – Adam Smith
By Alan Steel
Your biases can lead you to believe that things are true or connected, when sometimes they simply aren’t.
They are seductive little things, often invisible to the afflicted, and arrive on your shoulder to whisper advice into your ear often at the worst possible moments.
We see these biases played out most every day in the financial news; the wall of negative sentiment that’s been pitched up against record-breaking major stock market indexes for over eight years, assumptions about Brexit without an ounce of evidence to support a conclusion one way or the other, Donald Trump (steady now) vilified as ignorant and incompetent while America’s economy thrives.
These things are downright irrational. They make no sense. But the consensus holds sway because we love to agree with people who agree with us.
And when you set out to find evidence or an opinion that confirms a belief you already have, you’re damn sure going to find it…somewhere.
How well you control your biases can make or break an investment strategy.
John Maynard Keynes, considered the father of modern economics, attributed those irrational choices to what he called “animal spirits.”
Sure, blame it on the dog!
Remember though that Keynes’s second major legacy is the notion that governments can and should prevent depressions.
Good luck with that.
Right now one of the biggest confirmation biases going is about the stock market. Folks are convinced that it’s just about to fall from its lofty record-setting perch.
In fact, investors en masse have been convinced that a ‘market top’ has been imminent since March 2009, when the recession turned into a recovery.
Folks are both right and wrong about this. History tells us that there’s going to be a market top at some point in the future. That’s the way the markets have always worked.
It’s also how long-term investors grow wealth – by staying invested.
But the bias that’s hurting them – keeping them from eight years (so far) of compounded interest returns – is the one that’s kept them out of the markets all that time.
And those are the types of animal spirits that come back to bite you at retirement.