Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev | Next
Author: jbjorck One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 20179  
Subject: Psychology of Investing Date: 5/11/1999 7:53 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
David,

Kudos for your bringing psychology deliberately into the discussion of investment! I look forward to your future installments. I have not seen the book to which you refer, but let me offer what I believe to be a possibly even more common cognitive illusion. (Perhaps the book refers to it?)

I refer to the "illusory correlation." In short, this illusion is experienced when I DO notice events that confirm my expectations/beliefs, but I do NOT notice events that disconfirm them. Thus, I overestimate confirmations and underestimate the inverse. An old social psychology experiment can serve to illustrate (and I apologize that the reference escapes me.) The experimenter handed participants a stack of newspaper clippings and asked them to briefly look at each one. Each clipping depicted either a Caucasian-American or an African-American, and each article reported that the person portrayed was being arrested for a crime. After handing back the clippings, participants were asked to estimate from memory what percentage of the clippings portrayed each of the two ethnic groups. You might be able to guess that the participants (who were Caucasian) estimated that a majority of the clippings depicted African-Americans, when in fact there was exactly a 50-50 breakdown. This illustrated how prejudicial beliefs can be bolstered by the "illusory correlation," as participants clearly noticed clippings that supported their prejudice, but tended NOT to notice the clippings that disconfirmed prejudice.

The implications for investing are clear, particularly for those who go into the land of trading. Traders (even the "professionals") will tend to overestimate their success rates, based on the illusory correlation. They will remember their "wins" more readily and more readily forget their "losses."

Given these facts, LONG-term investing in good companies is a great way to avoid the pitfalls of the illusory correlation! Chalk another one up for a Foolish approach!

Fool on.

Jeff Bjorck
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev | Next

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Apple

Wal-Mart Nixes Apple Pay
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement