Your Worst Investing Enemy is You

Cognitive bias is what brings down most investors’ returns. Behavioral finance expert Victor Ricciardi weighs in.

By James Early, BBAE Chief Investment Officer

Investor, you’re your own worst enemy. Spades and spades of academic research attests to this.

Humans are wired – in the sense of heuristics and instincts – to succeed in an earlier era. An era when the confident caveman was likely the competent caveman. When doing something in a crisis was usually better than doing nothing. When there was safety in numbers.

These heuristics are still sometimes accurate today. But usually not in investing, which is part of the social science of economics.

That’s bad, but that’s also good. It’s deflating to find out that – unless you’re naturally amongst the top 5% or 10% of by cool, calm, steely demeanor – your brain isn’t set up to invest well without guardrails. It’s good because you don’t need to outrun the “bear” here – you just need to outrun your fellow, presumably equally flawed investors.

In other words, we’re all flawed. You don’t need to be un-flawed. You just need to be less flawed to succeed.

It’s a lot to take in in one video. And the academic literature is still evolving. I plan to cover this topic – behavioral finance – a lot, because it’s the single biggest pathway to investors like you and me getting better returns.

Have a look at this video I made with Professor Victor Ricciardi, one of the world’s foremost experts on behavioral finance.

James

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