When I am preparing for a race, I do make very ambitious timetables. When a sales team is asked to project, they make very high projections for years 2, 3, and onward. Many people are happy to give up some addiction ‘from tomorrow’. In normal parlance it is called ‘being clear about a virtuous tomorrow, but acting today’.
When offered a healthy snack and a chocolate bar for TODAY, people choose a chocolate bar. However they choose an orange for the next week. While it actually comes to the next week they switch to the chocolate.
We do this even while investing. Have you ever noticed that? This is called the present bias. In addition to this, what are the other mistakes we make while investing?
- Procrastination: If we have some unpleasant task that WE HAVE TO DO…the first thing we seek is ‘when is the last date’ – filing Income tax returns, paying the telephone bill, other utilities. We just love procrastination.
- Refusing to learn the simple aspects of investing, but hoping for results like Warren Buffett. What are the simple things? start early, asset allocation, equity, compounding. You have no choice, but to learn.
- Anchoring. Assuming that RE gives great returns, ‘my parents did not plan..but they managed’ , ‘equity is risky’ . LIC is the safest, ‘my pension plan will take care of my retirement needs’ etc.
- Overconfidence and other biases.
Investing is thought to be very complicated, and thus unpleasant. Thus like a visit to the dentist, you keep pushing it back till you can no longer bear the pain. Giving up 4-5 years of compounding is so amazingly stupid, the you need to see on a work sheet what it is costing you. In the UK and USA where people need to ‘sign on’ for Provident fund, ONLY about 25% sign up. Others do not want to spend time to know what it is.
The worst of course is Overconfidence. People look at their portfolio, see it is under performing and ask their Bank Relationship Manager. He/she says ‘market has not been good sir’ They come home satisfied that time will heal every wound. They keep forgetting that Time wounds every heel !!
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