Behavioral Finance
Doing nothing
“Many want to be long-term investors, but as the graph shows, few succeed. As behaviorists say, the problem is fundamental for investors.
Last week, I read this book: The Little Book of Behavioral Investing by James Montier, which very well describes the mistakes that investors make. In this note, I will focus on just one detail—dopamine received from transactions.
On one hand, it is difficult to resist the temptation to check daily how your stocks are performing. On the other hand, ‘doing nothing’ is almost impossible, despite the fact that many scientific studies and evidence point to its necessity.
Two practical tools that can help us fight our losing behaviors are ‘rules’ and a ‘journal.’
- Having rules allows us to focus on the process rather than the outcome; on key fundamentals rather than informational garbage; on logical decisions rather than emotional impulses.
- A decision journal allows us to reflect on why we are making a certain decision and what the outcomes of past decisions were. The thing is, people tend to attribute success to their own decisions and failure to external factors, thereby distorting history in their memory. It’s easy to deceive oneself in oral thinking, but writing creates a magical shield that protects the real history—provided the writing happens before making the decision, not after.”
Source of Idea
he Little Book of Behavioral Investing by James Montier