Our brain has not evolved as much as we think it has….so it makes us commit mistakes:

Let us see what helped us during our hunting days:

1. Seek maximum information: if we see an animal in the distance, we HAD to know whether it was a harmless (but useful to kill) deer or a dangerous tiger. So we sought as much information as we could assimilate, and that was rudimentary so easy to understand. So we continue to seek information – without developing the necessary brain power to distinguish between noise and information.

2. Seeking a pattern: We found out that carnivorous animals hunt in the dark (learning from the pattern of being attacked at night), many attacking animals could not climb trees, and animals normally hunt from behind. So now when we find ANY data in some kind of a pattern, WE ASSUME…that the next will follow the same pattern. This of course helps in advertising. Sachin Tendulkar is successful. He drinks Boost. If I drink Boost, I will be successful. Not so simple – but I am sure you get the trend!

3. Comparing options: Should I kill a deer or a rabbit? Effort is more or less the same – a deer would feed my family for a week, and rabbit for a meal. Simple options, easy to compare. So today we compare mutual funds, deposits, equity, unit linked plans…..and think we can do it successfully. Wrong. The guy who is telling you what to compare is like the magician. He makes the grid. You do not know how to make the grid. The making of the grid is the secret, not reading the grid!

4. Flying to safety: A tiger is approaching you…what do you do? Climb a tree. Your life depended on how well you climbed the tree, and how tall the tree was. Climbing a wrong tree, or a weak tree meant death. So now when you see the market crash, you sell and invest in bonds. When bond markets are down (and equity markets are up!!) you liquidate bonds and invest in equities.

Viola! Be careful of your brain!

There are simple ways to avoid these mistakes…we will see them later?

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  1. awesome short lesson on behavioural finance! and the start of basic economics on FB – with the post on The Federal Reserve! I did not know it was a privately owned body. Saw the film also, thanks.

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