If you’re not an extensive internet user, you may have missed a recent Reddit post that sparked another meme stock craze this week.
Even if you missed the latest furore, new technology has certainly given investors both options. what We don’t just invest how We invest in them. From flashy new investments like cryptocurrencies to online trading apps that make investing faster and easier than ever before, now may feel like the best time to be an investor.
And yet, I stand before you as an investing Luddite. Why? Because, while I’d like to think of myself as someone with sophisticated investing skills, I can’t deny the truth that I’m using the same hardware as my predecessors, and our brains aren’t adapted to this exciting investing environment.
To illustrate this, let’s look at what I might face if meme stocks rise.
I picked up my phone, opened Reddit, and saw that other people were clamoring to buy the stock. todayI see stories of people who previously invested in that stock and made a fortune, then I look up the current stock price and watch it skyrocket — suddenly, I’m hooked, and after a few taps on my phone, I find myself the (not-so-)proud owner of a meme stock.
Cognitive biases – misleading mental shortcuts – have led me to quickly make investment decisions that I didn’t really want to make.
- First, I saw that everyone else was excited and it intrigued me. This tendency to go along with the crowd is called herding behavior.
- Also, I had seen a lot of good news about this stock (both anecdotally and through its stock price history), so the availability heuristic allowed me to project its recent success onto my own future.
- In the end, I fell prey to the action bias that tells me I need to “do something” in the moment of excitement, or I might regret it.
There’s a reason our brains work this way: being able to make quick decisions with little information was beneficial for our ancestors. But when it comes to investing, making quick decisions with little information can lead to mistakes, especially when you’re empowered to invest large amounts of money with little effort.
The study also shows that making good investment decisions in the face of these new investment opportunities can be challenging. For example, investors who use online trading platforms tend to trade more frequently and hold their investments for shorter periods, both of which can eat into returns. We also found that investors are often motivated to invest in trendy assets such as cryptocurrencies out of a desire to chase the returns they see in the news – another behavior that can amplify losses.
In sum, we can see that while technological advances bring many benefits to investors, they also bring many challenges by encouraging costly behavior.
Stone Age Investment Methods
In the past, the time and effort required to invest protected us from biases in our behavior. To some extent, it forced us to slow down and rethink our knee-jerk reactions. But as technology lowers those barriers, we must create our own guardrails to ensure we make the right decisions.
That’s why I like to think back to the Stone Age when I invest. Not that I want to shy away from Wi-Fi or electricity, but there’s a lot we can learn from that time about executing long-term plans. So once I’ve decided on a financial plan, I like to think back to the Stone Age to help me stick to it and achieve my financial goals.
- I don’t read market news every day. Knowledge is power, but too much knowledge can distract from long-term planning. In the Stone Age, news took a long time to reach you, so only the important information eventually got through to you. Now, it’s harder to discern the important information from the deluge. By limiting the market media I consume, I do the same thing: I avoid the noisy daily ups and downs and focus on the bigger picture. This means that you may not even realize something is happening, like a meme stock rising, until much later.
- I remain skeptical of strangers’ stories. It’s all too easy to lie online, and even easier to forget it. We connect with strangers like never before, and feel connected to people we’ve never spoken to. But historically, it was rare to interact with strangers, and even rarer to immediately believe their words. That’s why I approach other people’s stories of investment success with a skeptical attitude. My skepticism helps me see things differently. Even if what they say is true, I don’t need to invest like them and replicate their success. That way I can focus on my own plans, not theirs.
- I do things slowly. I love convenience just like the next person, but sometimes we need a little friction. If I was trying to change my plans in the Stone Age, I wouldn’t have been able to do it with a few taps of my phone while lying on the couch. When something gets hard or time-consuming, it gives me time to think through what I really want to do. For me, this means that by not making changes to my investments on my phone, I can at least give myself the space to think about whether I really want to change my investments.
The cognitive biases we face when investing today have been with humanity for thousands of years and aren’t going away anytime soon, but by understanding how to create our own tools to counter them, we can still invest successfully and achieve our financial goals.
