Do you recognise this in yourself? If so, then you are on the way to sensible life judgements and investing. Not only that, but not recognising these traits will lead you to some awful judgements or inaction – we have seen it time and time again sadly. Here’s the next in our series!
‘Attribution bias’ is when you ascribe success to yourself but blame others/circumstances for your failings. Taking responsibility for your own decisions is crucial – both the ups and the downs! That way, you will learn even if the best thing to do on the failings is to repeat the mistake if that remains the ‘right’ thing to do when faced with the facts behind the judgment too!
‘Endowment bias’ places a higher value on something we have owned or do own. This might suggest our car is better than all other cars or our home is clearly a better home than other identical ones. It is hard to break-away from that but again, another trait when looking at our list of investments versus others’ lists. I suppose however that it is true that we learn more quickly about our returns when we hold something (rather than just watching it) that loses money too – a great teacher!
‘Bandwagoning bias’ is when you struggle to avoid simply following the crowd. Sometimes yes, it’s right to follow everyone else, but when it is not and it is sheer foolishness to act like lemmings and end up plummeting over the cliff (and actually they don’t but that’s another story…).
We’re contrarian, value investors – that means independently-minded and not ‘opposite’ just because, but it needs steely resolve to be prepared to go against the eternal optimists or the rabid pessimists sometimes and a great deal of patience too. Again, it’s about recognising the differences and not being sucked-up with everyone else in the misplaced hype – or pessimism.
‘Recency Bias’ gives us confidence in the recent past and its performance and that can be very dangerous as it creates complacency. The biggest risks we all face are the awful, big things which go wrong because we stopped thinking that they ever would (again). House prices can’t fall can they… I’ve had this investment for so long and it’s only ever gone upwards… so we end-up placing far too much store on information and recent history too, which supports our ‘prejudices’ and ignores the little boy crying wolf perhaps.
