Decision Heuristics

Or why we adhere so strongly to our beliefs.   One culprit is what the rule of consistency describes: a powerful force that compels us to act in a way that is consistent with our past behavior (this rule is extensively discussed by Robert Cialdini in his book “Influence: Science and Practice”).

Once we form an opinion about investing/politics/health/or any other topic, it’s very difficult for us to change our minds.

Examples are plentiful.  We stay loyal to certain brands, not considering the merit of new ones.  We use an iPhone and refuse to be educated about new Android devices.  We do the same things over and over again, but expect different results.  Even Albert Einstein knew that this is insanity.

If we invest by relying on those factors, then we would simply hate to change the way we approach this complex subject of investing.

Why?  Well, it is easier to stick to what you are doing rather than spend the time, effort, and expense to learn about a different way to invest.  However, those cognitive short-cuts often result in expensive errors in the long run.

Decisions Ahead

Alternatives can be very simple and easy to execute once you know where to start to automate your investments.

I recommend that you look into a Regular Savings Plan with monthly investments into Exchange Traded Funds (ETFs).  Then lean back and let the compounding interest perform its magic over many years.  Don’t touch it, except to increase that monthly investment sum when you get a pay hike—every pay hike.

There’s no reason why you should continue to be a victim of bad investment decision-making.  The recognition that these decision shortcuts (like those horrendously over-marketed and underperforming high-expense mutual funds and unit trusts) prevent you from earning higher returns is hopefully sufficient motivation to change the way you invest.

Warren Buffett: “Forming macro opinions, or listening to the macro or market predictions of others is a waste of time.  Do not listen to “pundits” or—worse still—act on their comments.”

Warren Buffett: “The true key to becoming rich is patient saving starting today and an understanding that wealth accumulation happens over the course of a lifetime.”

Warren Buffett:  “… the know-nothing investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”

2 Comments

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