Investing Against
Emotion
R
eason is probably one of the biggest distinctions between humans and animals. It has given us the ability to learn from different circumstances and to adapt over time. These lessons sit deep in our subconscious minds and instinct / emotions /intuition allows us to react quickly without having to reason ourselves out of every situation, especially if time is of the essence. We are also creatures that like to operate as part of a group and therefore tend to look for guidance from the majority of the herd. This all makes sense and is part of what has allowed humans to evolve and survive over time. However, intuition (even though not necessarily inferior to reason) is the “lazy” part of our brain and sometimes this lazy thinking can cause us to take suboptimal decisions driven by emotions or irrational herd behaviour.
good memories and easily forget the difficult times of the past. It is striking how rational we tend to be when it involves comparing prices in a shopping mall and how irrational we can be when it comes to comparing prices of investments. This often leads to emotional behavior that causes people to think that when things are going up (perceived safety), it will continue to go up and when things are tough it is all doom and gloom and prices will fall indefinitely (perceived danger). The result is that we buy high and sell low, exactly the opposite of what reason would suggest. Making an investment into a good asset when the price is low is probably the safest time to invest.
The herding behaviour drags our emotions up and down the roller coaster of economic cycles with the result that we are often overoptimistic when things go well and overpessimistic when times are trying. It is as though we suffer from Alzheimer’s as we mostly remember the
Volatility(things moving up and down) and probably best described through stock markets, tend to fuel irrational behaviour. Markets reward investors who are willing to take on more volatility through higher potential returns. What we have learned is that we can dissect clients’
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At IJG we realise that we are human beings subject to the same pitfalls. We therefore make use of a risk management framework that helps us to stay more rational through cycles:
