Investing – What We’ve Learned About The Psychology Of Investing

There is a theory that there are two ugly emotions that dominate our internal workings when it comes to any kind of financial decision; greed and fear, although this is an oversimplification certain lessons can be takenfrom this theory.

As naturally acquisitive creatures we are hard wired to want more resources for ourselves but this desire for more (greed) is balanced by a reluctance to be exposed to excess risk (fear).

We constantly walk a tightrope between these two forces and this balancing act determines our investing decisions.

This article is a helpful guide to explore what psychologists have learned in recent years about the hidden motivations behind our investing decisions.

Too Good To Be True

What human beings like more than anything else is congruence – this means that the real, external world needs to be similar, if not identical to the world created in our heads.

If we think we are clever and popular but the reality is that we are disliked, this incongruence can be very difficult to bear.

When we see something that looks like a good investment and we become convinced it will make us a fortune, we will often edit out information to the contrary.

If it doesn’t fit the mental map we’ve already created (or someone has created for us), we can often dismiss it. This is how scam artists succeed; they work with what you’ve already chosen to believe.

It is important to recognise that all human beings tend to fool themselves about the nature of the world around them and this tendency is amplified in investment decisions.

Editing The Past

Creating a happy story about past decisions is also a common human trait. We all have to have a positive tale to tell ourselves and others about how clever we are; we are social creatures and need to constantly be demonstrating value (whether real or imagined).

Therefore when we look at past decisions we will often see the positive and ignore past errors or losses.

Similarly, we will only see what we choose to see (unless we are very careful), when assessing future investing decisions.

The fearful mindset can often be replaced by over confidence. Some investors with a track record of successes come to believe their own myth and become convinced that everything they have the ‘Midas Touch’- everything they touch turns to gold.

Not only do they forget that King Midas’s magic touch was in fact a curse, but they also forget the simple fact that no one is infallible and errors can and do occur all the time. Far better to accept you might be wrong and avoid errors if possible.

Herd Thinking

The Wall Street created a huge stock market bubble and encouraged people to throw good money after bad into stocks with imaginary share values.

People did so because they saw friends, neighbours and strangers seemingly making pots of “magic money” out of thin air. Few stopped to question where this cash was coming from they simply handed over their life savings in the knowledge that all would be well.

It is important not to follow the herd blindly (sometimes the herd is right, sometimes it is wrong), you need to draw your own conclusions as to whether an investment is right for you.

Spending In The Now

Our evolution has conditioned us to spend in the now. As hunter gatherers we had little idea about where our next meal would come from and so consuming as soon as we happened upon food was the key to survival.

Saving for the future for many of us is the delaying of gratification, but it often is the determinant factor between those who retire rich and those who retire poor.

If you don’t want to be dominated by your hidden drives when it comes to investing, it might be an idea to speak to a financial advisor.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED