How do we avoid doing stupid things?
We’ve all done them: rushed off to the airport and forgot our driver’s license. Gotten off a train or plane and left a critical item behind: a wallet, a cellphone, the car keys. We take a wrong turn on the way home – a route we’ve driven hundreds of times – and suddenly we’re in a bad neighborhood, or we’re going the wrong way on the freeway and we lose most of an hour getting back on track.
We all do stupid things, but what is stupidity? Stupidity is overlooking or dismissing conspicuously crucial information. Everyone makes mistakes, but stupid mistakes seem unforgiveable. We feel we should know better! Research shows that there are seven major contributors to stupid mistakes: fatigue, stress, urgency, information overload, fixating on a goal, peer pressure, and being in an unfamiliar setting or circumstance. So: a world-class musician is late for an audition in an unfamiliar city and forgets his million-dollar cello in the cab. Or a 747 pilot who was diverted to an unfamiliar airport rushes through his checklist and begins his takeoff run without clearance, crashing into another airline.
Fatigue kills people. Medical errors – made by overworked, exhausted hospital staff who just want to finish their shifts – are the third leading cause of death in the United States, more than eight times the number of deaths from highway accidents. If you’re outside of your normal environment and you’re tired and stressed and rushing to get somewhere, watch out. Don’t make any big decisions. You’re in a danger zone.
Schematic of Tenerife Air Crash. Illustration: SafetyCard. Source: Wikipedia
That’s why the stress than comes from market downturns can be so dangerous. We’re goal-oriented: we just want to get back to where we were. We’re overloaded with information, from the news channels, our stock-market feeds, from the internet. We hear stories of friends or acquaintances who predicted this, or who claimed they had. We have trouble sleeping, we feel we need to decide, everything is now, now, NOW!
The best thing to do when we’re pushed and rushed and stressed is to slow down. Collect the most crucial data and reflect. Don’t just do something, sit there. Our most important information is about ourselves: what our investments are for, income, growth, security; when we might need the money; how we think about our savings – a nest egg, a gift, a critical resource. If the thought of a 20% decline in the market keeps us up at night, it’s time to reevaluate how much risk we can afford. Risk is the currency we pay to earn returns; market volatility how the bill comes due: not with a whimper, but with a bang.
S&P 1500, past 2 years, with 50-day and 200-day moving averages. Source: Bloomberg
Volatile markets and portfolio losses are the only true test of our capacity for taking risk, not a superficial six-question poll someone cribbed from a psychology lab. Winning at investing is hard work. It first requires that we avoid losing. To avoid making stupid mistakes – like panicking in a sell-off – we especially need to understand ourselves.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”