The Investor Behavior Question

So we looked at the problems with stock picking, market timing and track-record investing. The evidence strongly suggests we should avoid these investing pitfalls. So why do people still engage with them? Many people aren’t familiar with the research, which is an indictment on the investing industry, but the problem goes deeper than that. Even people who understand the research, even people who understand and assent to the research, still don’t consistently comply. Why is this? The industry calls it investor behavior, and it’s big business. I hear a lot about bad investor behavior, but I don’t hear much about why investor behavior is bad, or how to think helpfully about it. Here are a few reasons why I think it’s tough to be a good investor today:

1) The practice of buying low and selling high is ingrained in us. We’re deal shoppers. We see a good deal, something that’s worth more than its sale price, and we can feel great about the purchase. We’ve got TV shows that show us how to buy cheap houses and storage units in order to flip them for a profit. The booming fantasy football business teaches us to perform hours of research before drafting players (no? only me?) in order to find the underpriced guys who will overperform. We’ve got side hustles flipping cars, furniture, clothes, electronics, you name it. We’ve got sale adds spilling out of our mailboxes. That’s just how our world works, we shop for deals, things that are underpriced. Another way to say it, we’re always on the lookout for inefficiencies. But the stock market in not inefficient (see Are you stock picking?). It’s the one place we shop where there are no sales or discounts. It makes sense that we would apply our standard buying principles to investing, but unfortunately, our instincts aren’t helpful here.

2) Active investing feels right. Trading in a portfolio is exciting, especially if you think you’re good at it. A big win in the stock market makes for a really nice adrenaline hit. It’s similar to gambling. You can do it from your favorite chair in your living room, or a bustling coffee shop; it feels meaningful; it provides a perfect excuse to be constantly checking the news; you get to use your favorite tech gadgets (that’s what gets me). And even if you’re not the one making the trades, it just seems responsible to watch the news and track your returns every day. It seems right to talk predictively about the market, to decide on an investing strategy for the upcoming year. We’re not lazy people, we do our due diligence; unfortunately, with investing, we diligently do the wrong things.

3) We’re inundated with encouragement to engage in active investing. Financial news networks and websites were not created to educate their viewership, they exist to drive traffic. Since patience, diversification, minimal trading, (aka the staples of a good investment strategy) are really boring, news outlets lean heavily towards the predictive and active trading slant. Specific stock recommendations and bold market predictions fuel our instinct to do something with our investments. Again, it feels right to try to figure out where the market is going and how to profit from it. The news only tickles that itch.

Investing is counterintuitive and human behavior is often the trickiest part in investing. Sometimes we simply lack the knowledge required to be a good investor, but more often it feels like we should be doing more. When something needs fixing, we put our heads down and figure out how to fix it. Before we decide to buy something we do our research. But the way we make buying decisions in our every-day lives doesn’t work in the stock market. While we constantly look for inefficiencies, sales, discounts, deals, etc., the stock market is efficiently moving along on its unpredictable upwards trend. Instead of working to beat it, let’s ride it.

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