If investing is about seeing the future, it’s hard to do if you’re willfully blind, posits a recent article in The Wall Street Journal.
Even when the hard evidence is right in front of them, many investors choose to ignore it. If what you own becomes part of who you are, you run the risk of becoming a true believer, clinging to your investment ideas as rigidly as a ideological zealot. There’s no better recent example of this than the rise and fall of WeWork, as detailed in the book “The Cult of We: WeWork, Adam Neumann and the Great Startup Delusion,” by Eliot Brown and Maureen Farrell.
Gold bugs insist it is a powerful hedge against inflation when it’s not, bond investors have been predicting a surge in interest rate that hasn’t happened, and Amazon naysayers call it an overpriced stock, thereby missing out on large gains. The more you cling to an asset, the more it feels like a part of who you are, and admitting you were wrong about it feels like losing a piece of yourself.
As behavioral economist Richard Thaler says, “What investors fear even more than losing money is having to say, ‘What an idiot I am.’”
Instead, investors can benefit from using a “pre-mortem” approach by asking what could go wrong before making an investment. Overconfident people are less receptive to information that contradicts their views. By assuming you’ll lose every penny, you can lay out the reasons why your investment went to zero. This kind of forward-thinking evaluation can be much more productive than having to justify yet another bad investment.
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