Self-deception:
- Over optimism: People overestimate their ability. The classic behavioural example is when members of a random group are asked if they are above, below, or average drivers. The results invariably reveal a majority of above-average drivers, a statistical impossibility.
- Overconfidence: People feel more confident than they should. Men exhibit this trait more than women. Studies have shown greater hubris in men leads to excessive turnover and underperformance in investing. Complicating this, behavioural experiments have shown that the more (and often irrelevant) information we accumulate, the more confident we become.
- Self-attribution: People credit their skill for good outcomes and blame bad luck for bad outcomes.
- Hindsight: People forget or overlook what they knew and when they knew it. This is also called “success at correctly predicting the past.”
Simplification
- Anchoring: People grasp non-relevant information, often believing they are making better decisions. Montier gives the classic example of this as the experiment by Nobel laureates, Amos Tversky and Daniel Kahneman, using a rigged wheel similar to roulette, but one which always stops at either 10 or 65.3 Two groups asked the same percentage-based question responded differently depending on which number they saw after spinning the wheel.
- Representativeness: People judge by appearance rather than likelihood. As Montier points out, people like a good story rather than hard facts, and if numbers are involved, people are often quite bored.4
- Framing: People can give different answers depending on the same, but differently framed questions.
- Loss aversion: People typically give more weight to losses than to corresponding gains.
Emotional
- Regret theory: The fear of being wrong may outweigh the cost in objective economic terms, and lead individuals or groups to non-optimal conclusions.
Social Interaction
- Herding: Neurologists have found that real pain and social pain are felt in the same part of the brain. Contrarian strategies are the investment equivalent of seeking out social pain.
- Cascading: People’s actions can be totally independent of their own information and totally dependent on their observation of others’ actions or words.
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