Are you a Solider or a Scout When it Comes to Investing?

It’s no mystery that much of investor behavior (and, consequently, stock market movement) is fueled by emotion and reaction as opposed to hard data or statistics. A recent Ted Talk entitled “Why you think you’re right—even if you’re wrong” sheds some light on the subject of what drives rational thought. Speaker Julia Galef, president and co-founder of the Center for Applied Rationality, describes some of the machinations behind decision-making.

You don’t have to look far to find countless studies on the subject of investor behavior and the factors that affect it. Many of the guru strategies we employ are founded on the tenet that avoiding such emotional decision making is the best course. Ms. Galef explains what she calls “motivated reasoning” as a phenomenon in which our “desires and fears shape the way we interpret information.” She argues that judgement is largely influenced by what we want the outcome to be, even when we think we’re being objective.

If we apply this concept to investor behavior, then trading based on the thoughts and ideas of others and/or the latest news flashes are born of what Galef refers to as the “soldier” mindset. That is, investors are braced for battle, acting from a deeply rooted and reflexive need to defend and protect their bank accounts. This is in contrast to what she calls the “scout” mindset, in which a person is driven to evaluate situations honestly and accurately, without the emotion often attached to winning or losing. Galef contends that, ultimately, the scout mindset leads to better decision-making.

So, considering the vagaries of the stock market, would the investor be better served trading the sword for a cup of decaf and a calculator? Perhaps, but I wouldn’t hold my breath.