Behavioral Biases: Is Your IDENTITY Affecting Your Investment Success?

This question has many implications if I’m right about my particular theory. These implications run the full gamut, from how one conducts day-to-day affairs, interacts with others, to why we do what we do, think, act, and in fact how we live our entire lives.

I don’t mean to get too airy fairy on you, but consider that how we view and understand the world affects how and what we invest in. This should be patently obvious.  Understanding it is important, because it affects how profitable and successful our investment decisions turn out to be. We all know that thoughts precede actions, and actions precede results, and as such examining our thoughts may be more important than you might imagine. Actions bring us results, but actions without thought preceding them are a complete “lucky packet” and could end up being disastrous.

At the narrow end of the spectrum for example we have something as simple as impulse purchasing, which typically ends with disappointment, and less money in your bank account.  At the wide end of the spectrum we have knee-jerk reactions such as multi-billion dollar corporate bailouts, ordering armies into ill-thought wars, and decisions by the powers-that-be which have led to economic collapse before, and will no doubt do so again.  The latter typically drains the bank accounts of entire nations, and often times leads to senseless loss of life.

Identity-Based Decisions Can Be Disastrous

Think I’m being overly dramatic?

How about Gideon Gono? The previous central banker of Zimbabwe who believed that printing up currency would solve the short term problems of an economic contraction brought about by an overzealous government. Mr. Gono’s actions naturally led to hyperinflation, starvation, deaths in the thousands and hardships that far exceeded those that would have occurred without such moronic actions. It is clear that Mr. Gono acted without sufficiently thinking through what the result of those actions would likely be. There certainly was sufficient evidence available for him to have made far smarter decisions.

What does all this have to do with your identity?

Bear with me here. Our identity affects our thoughts and those thoughts naturally impact our actions and consequent results.

I’ve often wondered how it is that an intelligent conversation can be had on subjects such as how to bake a cake, when best to visit a particular country, or how to evaluate a company.  However, when discussing a topic that involves someone’s identity it all too often yields uniquely useless discussion, descending into an argument. People can never have a productive argument about something that is part of their identity, since they are partisan by definition.

I think the reason this happens is because things that involve our identity bring out emotions, and emotions often get in the way of a logical thought process.

Take for example a discussion between avid football fans or a discussion about religion between those of differing religious beliefs. The football debate can be settled by a contest (although I’m sure you’ve all seen the rioting that has taken place in Europe and elsewhere in the world with football contests). This rioting is not about football, but about people’s identity.

A religious debate cannot be settled by a contest. Religion is unique in that it is a topic which anyone can and often does have an opinion on; but, importantly many people identify themselves with religion. Possibly this is why the greatest conflicts in history always seem to come down to religious and political views.

It therefore makes sense to me that the stronger the identity which we attribute to a particular topic, the greater our risk of making errors in judgment.

Consider a discussion between a radical Catholic and a radical Moslem on the topic of religion. Then consider a discussion between the same two people on the topic of growing indoor plants. Hmmm…

I don’t believe therefore that it is the topic that needs considering, but the person’s identity with said topic.

From an investment point of view we have the potential for the same sort of ill-conceived and ultimately unprofitable thinking. Consider the statements – “I’m a buy and hold investor; I only buy growth stocks; I only believe in real estate as an investment”. The list can go on and on. The point is that all of these labels are potentially disastrous for our investments. There is a time and place for all of them and by labeling ourselves one thing or another irrespective of the fundamentals for any investment is plain dumb.

The more we allow outside influences to define our identity, the more we close off our potential to view the world with tolerance and logic. It is clear that many people cannot think clearly about anything that forms part of their identity. In short, labeling ourselves makes us dumber not smarter.

The Wake-Up Call

Many years ago I made a habit of examining my beliefs, identity and thoughts, and testing them with logic. Where they failed I subsequently discarded them. This is much easier to say than to do, especially where we have been brought up to believe certain things and never allowed the chance to question the authenticity of those beliefs. It amounts to acting without thinking, and this in itself leads to a dogmatic, unhelpful and dangerous viewing of the world, and certainly leads to making poorer decisions which directly affect our wealth.

Here’s to thinking better thoughts, making better decisions and having better outcomes.

Chris

“If you do (believe) what you’ve always done (believed), you’ll get what you’ve always gotten.” – (Slightly modified) Tony Robbins

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Vik
Vik
11 years ago

You cannot believe how many Vancouverites believe real estate is a sure-win investment in this city regardless of any logical macro arguments to the contrary!

Vik
Vik
11 years ago

The looks I get from Normal People whenever I mention that one’s personal “principle residence” is a consumer good with ongoing liabilities and NOT an investment asset ranges from blank confusion to outright anger and hostility!
And that’s before going into the future direction of interest rates.

But I’m cognizant that perhaps the contrarian aversion to real estate I developed from living in this city may bring a negative bias to real estate in general in markets where the fundamentals are do not warrant such judgment.

John
John
11 years ago

Discarding something based on “logic” seems very similiar to limiting your potential through labels.