Optimism
In the previous post I wrote about overconfidence. Another aspect that influences investor behavior, and closely related to overconfidence, is optimism.
How good driver are you compared to others on the road?
The research by Kahneman (Aspects of Investor Psychology by Daniel Kahneman, PhD) and other articles I found on the Internet, suggests an overwhelmingly percentage (80%) of people believe that their driving skills are above average. Although I could not find any statistics on driver abilities (I conclude that it must be very difficult to measure), you have to agree that this is a typical illustration of optimism.
Optimists also tend to underestimate the likelihood of a bad outcome in an event in which they have no control over. For example, most under graduates believe that they are less likely than their roommates to develop cancer are or a hart attach before the age of fifty.
Optimists are also prone to the illusion of control and tend to underestimate the role of chance in human affairs.They tend to misperceive games of chance as games of skill.
The combination of overconfidence and optimism is a potent brew. People start to overestimate their knowledge,underestimate the risks, and exaggerate their ability to control the event.It then leaves them susceptible to statistical surprises.
Is the glass half empty of half-full?
Do The Optimist Test at (40 simple questions) to establish your level of hopefulness and it might save you a few thousand rand in potential investment losses.
When you are a typical optimist (nothing wrong with that!), it is recommended to actively think of the worse case scenario and to remember those events that did not go your way. To assign realistic odds at something will manage you expectations of investments for example. When looking at statistics, try not to focus just on the positive results.
Optimists who have the further trait of being regret-prone, meaning they do not really regret the mistakes - have an even worse combination! Both for themselves, and those trying to help them. Identification of these tendencies is therefore very useful.
Your Brain
This time however, the difference between the Left and the Right side of the brain.
My friend in England, Desiree has sent me this rotating image to determine which side of your brain the dominant one is.
There is no right or wrong, but send me your results at jaco@amedco.co.za and we will compile our own results. (I am a Right-Brain'er. Even if I try, I cannot reverse the turn – most people are able, I have been told.)
Left Brain Functions
Uses logic, detail oriented, facts rule, words and language, present and past, math and science, can comprehend, knowing, acknowledges, order/pattern perception, knows object name, reality based, forms strategies, practical, safe.
Right Brain Functions
Uses feeling, "big picture" oriented, imagination rules, symbols and images, present and future, philosophy & religion, can "get it" (i.e. meaning), believes, appreciates, spatial perception, knows object function, fantasy based, presents possibilities, impetuous, risk taking.
When making investment and other decisions, it is useful to know the mind who sits behind these actions. I have always thought that being myself means that you know yourself and that is just where I made the biggest mistake of all.
It looks to me, that my mind has a mind of its own!
Feedback always welcome at jaco@amedco.co.za or +27 12 644 1917.
