In reading Burton Malkiel’s Random Walk Down Wall Street, I came across an important insight that I felt obligated to share.
“Psychologists have long identified a tendency for individuals to be fooled by the illusion that they have some control over situations where, in fact, none exists.”
Malkiel goes on to explain multiple experiments where average humans were consistently tricked into thinking they had control over completely arbitrary outcomes.
Malkiel explains, “It is this illusion of control that can lead investors to see trends that do not exist or to believe that they can spot a stock-price pattern that will predict future prices.”
Long story short, most people do not even begin to understand probability or their own intellectual shortcomings. Our egos trick us into thinking we are above average investors, when all statistics point to that probably not being the case.
And that’s just the tip of the iceberg. There are countless other cognitive biases plaguing your decision-making on a daily basis. I could probably exclusively blog about this phenomenon for all of 2016 and still not cover all of them.
So what can you do? There are two very basic steps.
It’s a constant battle, but worth the fight.
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