“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ…Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” ~ Warren Buffett
We call ourselves rational beings. The truth is that we aren’t rational but rationalising beings.
The brain that sits on the top of your head isn’t a flawless machine. Yes, it is powerful. But it has its weaknesses. In everyday terms, we call such weaknesses as ‘biases’.
The good part is that while we cannot exchange our brains with other people nor can we upgrade it at a hardware shop, we can reduce the number of mistakes that our biases cause by just taking notice of them.
Of course, you still can’t eliminate all behavioural mistakes. As Prof. Sanjay Bakshi said in a recent interview with Safal Niveshak, despite forming a habit of practicing good behaviour…
…you can’t eliminate errors. Life is about making errors and learning from those errors. So when you’ll fix one error, you’ll have another one creeping in. But you’ll make fewer errors and certainly fewer of the devastating errors that can destroy your returns or your life.
Anyways, biases are holes in our brain’s reasoning abilities. And these biases can damage our decision making.
Here is an impressive document from Whitney Tilson, a noted American investor and author, which serves like a crash course in behavioral finance when applied to the subject of value investing.
I first read this document five years ago. But it has served me well time and again…each time I am in a need of cross-checking if my brain is fooling around with my stock analysis. 🙂
Click on the image below to download the document. If you can’t see the image below, click here.
Let me know the biases you can closely associate with from your recent investment operations.