{"id":26695,"date":"2023-02-15T15:43:00","date_gmt":"2023-02-15T10:13:00","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=26695"},"modified":"2023-02-15T18:14:46","modified_gmt":"2023-02-15T12:44:46","slug":"how-to-avoid-behavioral-blindspots-in-your-investment-decisions-while-still-remaining-human","status":"publish","type":"post","link":"https:\/\/www.fundsindia.com\/blog\/mf-research\/how-to-avoid-behavioral-blindspots-in-your-investment-decisions-while-still-remaining-human\/26695","title":{"rendered":"How to Avoid Behavioral Blindspots in your Investment Decisions (while still remaining human)?"},"content":{"rendered":"\n
\"\"<\/a><\/figure>\n\n\n\n

The picture below shows two yellow lines on a railway track. <\/p>\n\n\n\n

Can you tell which one is longer? Is it the one closer to you? Or is it the one farther to you?<\/strong>

You just have 5 seconds to answer. <\/p>\n\n\n\n

\"\"<\/a><\/figure><\/div>\n\n\n\n

If you\u2019re like the rest of us, the line which is farther to you will appear longer. <\/p>\n\n\n\n

But here comes the surprise – both the lines are exactly the same length!<\/strong><\/p>\n\n\n\n

You can check the image below to verify. <\/p>\n\n\n\n

\"\"<\/a><\/figure><\/div>\n\n\n\n

While our intuition (read as gut feel) usually does a good job for most of our decisions, in certain contexts, they end up misguiding us. The above illustration is a classic case.<\/p>\n\n\n\n

And here comes the tough part. Even if you know about this illusion, it\u2019s difficult to unsee this <\/strong>illusion the next time. <\/p>\n\n\n\n

So what is the solution?<\/p>\n\n\n\n

Simple. Don\u2019t go by your intuition. Use a RULER. <\/strong><\/p>\n\n\n\n

\"\"<\/a><\/figure><\/div>\n\n\n\n

Drawing a parallel, in investing there are a lot of situations where your gut feelings and intuitions misguide you to take the wrong decisions. These decisions while they \u2018feel\u2019<\/strong> right in the short term have a significant adverse impact on your long-term investment outcomes. <\/p>\n\n\n\n

While a lot has been written about behavioral biases (read as quick shortcuts used by the brain to make decisions) the actual problem is not about awareness or knowledge. <\/p>\n\n\n\n

The real problem is that – it\u2019s insanely difficult to implement counter-intuitive decisions on a regular basis<\/strong> especially when the stakes are high and money is involved!<\/p>\n\n\n\n

This is where you need a RULER equivalent in investing to help you take the right investment decisions. <\/p>\n\n\n\n

Enter \u201cFRAMEWORKS\u201d!!<\/p>\n\n\n\n

The Power of Frameworks<\/span><\/strong><\/h4>\n\n\n\n

Think about frameworks as a set of investment principles, strategies, or rule-based guidelines that will guide your investment decisions. They should be evidence-based, repeatable, and behaviorally aligned to your personality. <\/p>\n\n\n\n

By organizing information better, helping you focus on the few key variables that matter (vital few vs trivial many), and reducing emotions and human biases, frameworks can help you make good investment decisions on a consistent basis.<\/p>\n\n\n\n

Instead of me explaining the need for frameworks, let me take the help of the world\u2019s greatest investor to do the job for me \ud83d\ude42<\/p>\n\n\n\n

“To invest successfully, one doesn’t need a stratospheric IQ. What’s needed is a <\/em>sound intellectual framework for making decisions <\/em><\/strong>and the <\/em>ability to keep emotions from corroding that framework<\/em><\/strong>” – Warren Buffett<\/em><\/p>\n\n\n\n

So the key idea is to start developing your own investment frameworks based on long-term evidence and behavioral insights. This can also act as a good defense mechanism against behavioral errors and emotional decisions. <\/p>\n\n\n\n

6 Ps of Behavioral errors<\/span><\/strong><\/h4>\n\n\n\n

While there are several behavioral errors, here are the 6Ps of Behavioral Errors<\/strong> that cause the maximum damage. <\/p>\n\n\n\n

  1. Panic Selling<\/strong>