Changing my own views/ideas is the hardest thing I have done.
I have assumptions about how the world works or what market will do after say COVID19 then there is a reality of how the world actually works.
Denial of inconsistencies between the functioning of the world & how I think the world should work, driven by a deep desire to have a clean narrative of cause and effect. We all have theories about what should happen in the world or market despite the inherent complexities of everything involving money.
Someone once described Donald Trump as “Unable to distinguish between what happened and what he thinks should have happened.” Politics aside, I think everyone does this.
Why I can not distinguish between what should happen & what has happened?
There are 2 behavioural biases here.
Information Bias
I see a lot of information in the world. Ease of access & availability of information gives me a sense of understanding. In reality, just having more information means nothing.
“Wealth of information creates a poverty of wisdom.”
I can’t process all the information available, so I have to filter it.
Confirmation bias
You only filter in the information that meshes with the way you think the world should work. We discard any counter view or pointer as an anomaly.
Since we love a clean narrative about what we see and how the world works. We bury inconsistencies between what we think should happen and what actually happens.
An example. The stock market must correct because of pandemic & economic slowdown. That’s a common-sense narrative. But the correlation between the financial market and economic slowdown is hard to spot. So, if you hold on to the narrative between financial markets & economic reality, you say there must be something wrong with the market participants. And you may be right! Everyone just believes what they want to believe, even when the evidence shows something else. Narratives over Numbers.
Accepting that everything involving money is driven by illogical emotions and has more moving parts than anyone can grasp is a good start to remembering that history is the study of things happening that people didn’t think would or could happen. This is especially true with money.
What we can do?
1. Always consider the other side of your views/assumptions.
2. Adjust your strategy based on what has happened & not on what should happen.