Why do our brains make it so hard to make money?
Thinking is hard work. Concentrating hard on a task drains sugar from key parts of the brain. So we use shortcuts to help us make decisions. We draw pictures; we remember past experiences; we tell ourselves stories to explain the data.
Most frequently, we engage in wishful thinking. We look for facts to confirm our prior assumptions, rather than letting the information speak for itself. After all, we’re told to take a positive outlook on life; positive people are more pleasant to be around; upbeat, hopeful entrepreneurs seem to accomplish more.
But wishful thinking is dangerous when it comes to investing. Wanting something to be true won’t make it so. Markets aren’t always rational, but in the long run they’re driven by financial information. So investors need to discipline themselves to rely on facts, not feelings, when they put their money to work.
One way to do this is stick to the numbers. Unlike people, numbers aren’t subject to emotions. Quantitative analysis is driven by data. And companies in the US release a lot of statistics. One manager assigns numbers to the companies in his portfolio, rather than looking at their names or ticker symbols. That way he doesn’t get attached to them when it comes time to sell. It’s a mistake to fall in love with a stock.
Thinking is hard work. That’s why it’s so rare. It’s data, not hopes, that lead to investment success.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!