Imagine what it would be like if you woke up every day and had to learn all physical and mental tasks from scratch. It’s impossible to even imagine such a situation. Thanks to the human brain, we don’t have to bother about most tasks every single day.
Through countless sets of programmes, the human brain ensures our smooth and consistent functioning. Habits, which routinely repeat themselves subconsciously, are also a result of this process. But while habits can be good, and good habits doubly so, there are several disadvantages to this mental conditioning as well.
Habits often come in the way of any kind of change or transformation. As Charlie Munger puts it aptly, “People tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often re-examined or changed, even though there is plenty of good evidence that they are wrong.”
This brings us to the inconsistency-avoidance tendency, which is very rampant amongst human beings. In simple words, we filter away any piece of information which may be inconsistent with our ideas and beliefs.
You may have read as students how many great scientists and discoverers were often discredited and ridiculed for their so-called lunacies. Many were only acknowledged for their great work after their death.
Inconsistency-avoidance
Our aim is not to profess psychology for its own sake, but to relate it to human behaviour in the stock market. Stock markets are largely driven by sentiment.
So you must do your best to be objective and guard yourself from the lures of greed and fear.
Getting back to inconsistency-avoidance tendency, can you remember instances when you have used this tendency to your own peril? Have you lost money on your favourite stock that had once been an outperformer?
The company's prospects may have changed, it may no longer be worth putting your money into, but you still couldn’t let go of it. Why? Because letting go of it would be inconsistent with your original beliefs about it.
So you did everything to console and convince yourself that nothing was wrong. But your portfolio losses have a different story to say, don’t they? Each investor will have innumerable such instances to share. Now the more important question: how do you get rid of this tendency?
Lesson from law court There are several ways to do that, but more than anything else, you need to be disciplined with your investment approach. One great way is to play the devil’s advocate. If you find a prospective company very compelling, first start with rejecting the hypothesis. In other words, try to gather facts that prove the stock is a bad investment. After all your analysis, if you arrive still at the conclusion that the stock is good, it has passed the bar. You can also take a good lesson from courts of law.
Law courts have processes and procedures in place that tend to minimise hasty and biased decision-making, which can cost someone’s life. As investors, you must learn not to be hasty. Adjourn your stock purchases till you’re clear in your mind.
Remember, stock markets will always keep swinging between highs and lows. You will always find investing opportunities.
If you can tackle your inconsistency-avoidance tendency, money will consistently flow into your bank account.
(This article is authored by Equitymaster.com, an independent equity research initiative)