I devoted one of the three sections of my book Avantage Bourse to investment psychology. In this section, I quoted Gautam Baid, author of The Joys of Compounding (a must-read!) on the topic of psychology: “Your lifetime achievement as an investor will be determined primarily by how you conduct yourself during the occasional periods of extreme market behavior.” I wouldn’t say we are currently going through such a “period of extreme market behavior,” but I believe that many investors might be tempted to think so.
In such conditions, it’s helpful to recall some of the psychological biases that can make us lose our footing during particularly stressful periods.
So let me revisit the 10 psychological instincts identified by Mr. Hans Rosling in his book Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think, another book I highly recommend. You will notice that most of these psychological instincts explain the behaviors investors might adopt right now.
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The Gap Instinct. This instinct refers to our natural tendency to divide the world into two distinct and incompatible groups and to imagine a huge gap between them. West and East. Developed and underdeveloped countries. Rich and poor. Democratic and totalitarian states. Republicans and Democrats. The reality is that the world is rarely black or white, but mostly gray: most phenomena fall somewhere in the gap between the two extremes we imagine. Right now, everything may seem dark in the U.S., but is it really?
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The Negativity Instinct. Bad news grabs our attention more than good news. These days, most media outlets are particularly negative and echo anxiety-inducing stories.
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The Straight-Line Instinct. We tend to extrapolate: naturally, we imagine that a recent trajectory or trend will continue in the same direction and at the same pace. I believe the direction the new U.S. administration is taking is not the right one, but we shouldn’t extrapolate the recent trend. The direction could very well change in the coming months.
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The Fear Instinct. It’s hard to think clearly in the best of times—imagine when we’re afraid. But aren’t there many reasons to be afraid right now, whether it’s the threat of Canada becoming an American state or that tariffs might push our economy into recession?
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The Size Instinct. We all tend to focus on things out of proportion, misjudging the magnitude or importance of a phenomenon or figure.
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The Generalization Instinct. We all share a natural propensity to categorize. But categories can be misleading. Right now, it would be easy to lump all Americans in with their president, but that would be an incorrect generalization.
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The Destiny Instinct. We should be wary of our natural tendency to believe that “things have always been this way and won’t change.” Indeed, I wonder whether what seems to be an all-out attack on democracy in the U.S. and in other countries lately might ultimately lead to a renewed appreciation of democratic values and the strengthening of the checks and balances that have protected them for decades.
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The Single Perspective Instinct. Simple ideas that explain all phenomena are often wrong. We all tend to see things through our own experience.
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The Blame Instinct. We always seek to blame someone for a given problem, but we must first blame the system. We need to try to understand the system—the way the world works—rather than pointing fingers. Right now, we all know who our finger is pointing to for most of the planet’s problems.
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The Urgency Instinct. When we feel pressured to make quick decisions, we make mistakes. It seems to me that one of the U.S. administration’s negotiation tactics is to destabilize, notably by placing people in front of quick ultimatums.
I’m the first to say that the current situation is highly unpleasant. But who said long-term investing was always enjoyable? What I’ve learned from my reading, in addition to my 40 years of experience in the stock market (which includes many highly uncertain and stressful periods!), tells me that the worst thing to do right now would be to panic and stray from your long-term game plan. Let’s not allow ourselves to become our own worst enemy.
Philippe Le Blanc, CFA, MBA
Chief Investment Officer at COTE 100
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