Finance 11. Neglect of probability Investing isn’t about certainties – it’s about probabilities. But probability is a very tricky thing: anyone who checks the weather is at least familiar with the concept, but actually sitting down and calculating the percentage chance of sun, clouds, rain or anything in between is beyond most of our capabilities. And even the professionals get it wrong sometimes. Little wonder why many of us tend to overestimate, underestimate, or just at-out ignore the chances of a certain event happening. Or, we tend to view extreme outcomes as the only possibilities, while ignoring the continuum that may lie between them. is leads us to “misprice” those probabilities as well – we pay far too much for insurance that we’ll likely never need, for example, or we invest in risky opportunities (or we do it at a price that’s too expensive), because we don’t really have a good idea of the likelihood of a company’s success, or of a market downturn. How to protect yourself – Train yourself to think in probabilities: seek out analysis that addresses a range of future outcomes, rather than just either/ or. Be prepared to change your consideration of probability, as underlying circumstances change. 10. Bias for action is is a particularly strong bias for company founders and entrepreneurs, as well as for many executives and professionals. In the business world, taking quick, decisive action is o en rewarded. Pouncing on an opportunity, making a quick course-correction before problems get out of hand – o en, this can be the di erence between life and death for a small company. is “get-‘er-done” mentality is o en celebrated in our society, and can become a default approach for many people when dealing with their nances as well. Investing o en requires a distinctly di erent mindset, however. Action needs to be considered strategically, options need to be weighed carefully, and outcomes and probabilities need to be considered – all of which takes time. And, in a lot of cases, taking no action whatsoever can be the most rewarding action of all. How to protect yourself – Understand that action ful lls a deep psychological need − by doing somethingabout our nances, we create the illusion of being in control of a situation. at’s ne, but your portfolio may be better served by a patient, wait-and-see mindset. No, it’s not as exciting as taking bold risks and decisive action. But it o en results in better outcomes. 9. Self-attribution bias ink back to a successful investment which you made. What was the reason it was successful − what exactly did you do, or see, or realize that led you to success? Now, think about an investment that didn’t work out. What happened? Why was it not successful? If you’re like many people, you tend to attribute good outcomes to personal skill or insight, while attributing bad outcomes to external factors. Essentially, this is a problem of overcon dence: the human brain likes to think of itself as more insightful and more capable of predicting future outcomes than it really is. We think of ourselves as smart, while discounting the possibility that just being in the right place at the right time had anything to do with our good fortune. How to protect yourself − take a lesson fromWarren Bu ett: be humble when it comes to investment success, and honest when it comes to investment failure. Resist the temptation to believe that your knowledge and/or your investment ability is superior to the thousands of other amateur and professional investors out there. Remember that, unlike many other things which you will do in life, randomness and unpredictability play large parts in investing. True success comes down to admitting it. 36 | www.snowbirds.org
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