Boomers, Markets & Money

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What is Stopping Me From Investing my Money??

Investing Anxiety

Investing Anxiety

My friend Ann said, “What I want to know is: What is stopping me from investing my money?”

Ann is not alone. A Nationwide Financial survey found that more people are afraid of investing in the stock market (62%), than are afraid of death (58%), or public speaking (57%.)

Daniel Kahneman, psychologist and winner of the Nobel Prize in Economics, gave advice on this topic in his book Thinking, Fast and Slow. Kahneman gave this sermon to fictional character Sam:

“I sympathize with your aversion to losing any gamble, but it is costing you a lot of money.”

Kahneman advised, “You will do yourself a large financial favor if you are able to see each of these gambles as part of a bundle of small gambles and rehearse the mantra that will get you significantly closer to economic rationality: you win a few, you lose a few. The main purpose of the mantra is to control your emotional response when you do lose.”

The author did not condone reckless gambling. He had three limits on his “win a few, lose a few mantra.”

  • Diversify. The gambles have to be independent of each other. “…it does not apply to multiple investments in the same industry, which would all go bad together.”
  • Don’t bet the farm.  The gamble should be small enough so you are not worried about a significant loss to your wealth. “If you would take the loss as significant bad news about your economic future, watch it!”
  • No long shots.  This mantra doesn’t apply to long shots which he described as “the probability of winning is very small for each bet.”

Kahneman said you have to have emotional discipline to follow the above rules. But his main point is that you should see each decision as one of many small decisions in a portfolio.  Emotional distress can also be reduced by cutting back on how often you check how your investments are doing.

Related Blog Posts

“How to Handle Emotions When Making Investment Decisions”

“When to Trust Your Intuition or Gut Instinct When Making Financial Decisions”

“How the Heck Do I Invest my Money?”

Sources

“Nationwide Financial Survey Finds Fear of the Markets Trumps Fear of Death”

“Thinking, Fast and Slow” by Daniel Kahneman, pages 338-339


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When to Trust Your Intuition or Gut Instinct When Making Financial Decisions

How Feelings Can Affect Investment Choices

Feelings and Investment Decisions (Click to Enlarge)

Traditionally, being rational and objective was highly prized in the investment decision process. Emotions were to be controlled and repressed for fear of making bad decisions. However, early studies that combine psychology, the biology of the brain, and investment risk are beginning to challenge that view.

I recently read an article in CFA Institute’s magazine called “Sentimental Journey” that reviewed recent research. Cynthia Harrington referred to research conducted by Columbia Business School professor Michel Pham and associates published in the Journal of Consumer Research. They researched how people’s trust in their own feelings affected decision-making. The exhibit below gives a quick summary of the research.

Why It Is Important to Know How Trust in Feelings Affects Decisions

The researches are trying to figure out if gut instincts improve the accuracy of predictions in decisions in uncertain events with high stakes. This could help decisions made by professionals in many varied areas such as the Pentagon, Wall Street, weather prediction, to name a few.

Methods

Should We Pay Attention to Our Feelings When Making Decisions?

Summary of “The Emotional Oracle Effect” (Click to Enlarge)

People were divided into two groups:

  • People who had high trust in their feelings
  • People who had low trust in their feelings

Subjects were asked to make decisions in the eight studies mentioned in the Exhibit to the right. (Click to Enlarge.)

Conclusions on Whether Feelings Help us Make Better Decisions

People who had high trust in their feelings were more accurate in their predictions in all the studies.

However, this effect only occurs when people have sufficient background knowledge in the decision area.

People who trusted their feelings didn’t make rash decisions. They still took the time to carefully consider the information.

Why Feelings Can Help Us Make Better Decisions

While a more analytical approach with just a few inputs might seem more logical, it could be leaving out key information that your feelings are hinting at. Study authors speculate that when a person trusts their feelings about a subject they have experience with, they access “a vast amount of information that people learn consciously and unconsciously about their environment.” Professor Pham believes that feelings “…tap into all we know about our environment.”

Knowing how and when to trust our feelings when we are choosing an investment can help us improve our choices.

Sources

“Sentimental Journey” by Cynthia Harrington. CFA Magazine, March/April 2013.

“Feeling the Future: The Emotional Oracle Effect” by Michel Tuan Pham, Leonard Lee, Andrew T. Stephen

Related Posts

“How To Handle Emotions When Making Investment Decisions”