In my last post I explained that the human brain is built ill-equipped for the investment world. The typical human fear/greed responses are counterproductive to our long-term investment goals and, though they may be natural tendencies, we must learn the discipline to brush them aside in order to achieve investment success. One step towards this discipline is to understand our brain’s two decision-making systems: the “quick response” and the “slow and thoughtful.”
James Montier, author of The Little Book of Behavioral Investing (a recommended reading), describes these two decision-making systems using Star Trek characters Dr. McCoy and Mr. Spock. Dr. McCoy, a human, allowed his emotions to rule him. Mr. Spock, half human and half Vulcan (a species that suppressed all emotions), prided himself on allowing only logic to drive his decisions.
The “McCoy” part of the human brain drives our quick-response, emotional approach to decision-making and is the area of the brain referred to in my previous post that allowed us to survive on the African Savannah. This system engages automatically and relies on our multitude of biases in order to make a quick decision, even when faced with large amounts of information. It is a quick and dirty way to make decisions, and will be satisfied with being approximately correct.
On the other hand, the “Spock” part of our brain drives the logical and thoughtful approach to decision-making. Unfortunately, it requires deliberate effort to engage and follows a slow, serial analysis of the information before rendering a decision. So, even though it is effective in making decisions, it is often superceded by the quick and easy McCoy. In fact, the McCoy decision-making approach is more likely to engage when there is lots of information, when the problem is ill-structured and complex, and when stress levels are at an extreme due to time constraints and/or high stakes. Hmmm…sounds a lot like investing! Making quick and easy decisions regarding your investments, however, is unlikely to lead to financial success.
When faced with difficult investment decisions, we must learn to brush aside our natural McCoy tendency to rely on the automatic, emotional impulse. We must learn to channel our inner Spock which can, albeit slowly, analyse information, apply logic and render a rational decision as free from emotions as possible. We will benefit by having a solid long-term investment strategy in which we have conviction even during difficult market conditions. While changing behaviour takes time, understanding what needs to be changed is the first step towards improvement.
Think long term and prosper!
This post is presented for illustrative and discussion purposes only. It is not intended to provide investment advice and does not consider unique objectives, constraints or financial needs. Under no circumstances does this post suggest that you should time the market in any way or make investment decisions based on the content. Select securities may be used as examples to illustrate Burgundy’s investment philosophy. Burgundy funds or portfolios may or may not hold such securities for the whole demonstrated period. Investors are advised that their investments are not guaranteed, their values change frequently and past performance may not be repeated. This post is not intended as an offer to invest in any investment strategy presented by Burgundy. The information contained in this post is the opinion of Burgundy Asset Management and/or its employees as of the date of the post and is subject to change without notice. Please refer to the Legal section of this website for additional information.
