EC Mind Games

In Bubbles and Elevators”, we discussed how human beings do seemingly ridiculous things to fulfill their instinctive need to mimic what others are doing, right or wrong, logical or illogical. The greatest investors, those that make money when markets are rising and avoid the pain when bear markets occur, are a limited bunch. It is not luck that makes them special, nor is it necessarily their ability to find fundamental and/or technical set ups that provide great opportunities. Ultimately, these investors possess the ability to understand and overcome the inherent behavioral traits that handicap most investors. To use a trite phrase- the great ones are truly able to think outside of the box.

Behavioral Traits

Confirmation bias, group think, and cognitive dissonance dominate our logic and the way we interpret the world around us. It is our hope that, through a better understanding of each of these behaviors, we may encourage you to consider views that are outside of the box.

  • Confirmation Bias – This bias, a form of cognitive bias, is a condition of the human mind that occurs when we seek or interpret information in a manner that tends to confirm our existing beliefs or hypothesis. Those exhibiting this bias pay little attention to opinions and data that may offer alternative possibilities.
  • Group Think - This mental occurrence arises when a group of people seeking conformity think and act in similar fashion to each other. Typically the group will reach a consensus opinion without proper evaluation and with a lack of alternative viewpoints.
    From Wikipedia- “Groupthink requires individuals to avoid raising controversial issues or alternative solutions, and there is loss of individual creativity, uniqueness and independent thinking.” 
  • Cognitive Dissonance - This condition is experienced by an individual that holds two or more inconsistent thoughts at the same time, including new information that conflicts with existing beliefs. Frequently humans actively avoid information or opinions that may introduce or strengthen discrepant views.
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Gary Tanashian 10 months ago Contributor's comment

Very good points to this article. I would add that there are times you want to tune out the prevailing wisdom as well, because there are times when FOX and NYT are pounding the same themes (e.g. interest rates or other non-political market functions).