You played yourself

Author: Morgan Housel
Source: Collaborative Fund (https://www.collaborativefund.com/blog/you-played-yourself/)

Insightful as ever, Morgan Housel takes us on a tour of the lesser known – but just as deadly – behavioural finance pitfalls (which are less discussed than the better known pitfalls such as anchoring and overconfidence).
–   Pluralistic ignorance: “The heart of pluralistic ignorance is having misperceptions about how others in your peer group think. And that’s usually what happens when you have a view about an investment that you assume isn’t held by a large percentage of other investors. Take the Berkshire Hathaway annual meeting, which is coming up next week. It’s 40,000 people, all of whom consider themselves contrarians. People show up at 4 am to wait in line with thousands of other people to tell each other about their lifelong commitment to not following the crowd. Pluralistic ignorance at its finest.”
–   Illusory correlation: “Assuming two things are correlated because that correlation seems common sense, even though there’s actually no relationship. Then you only notice times when those two things coincidentally appear next to each other, ignoring all the times they don’t, leading you to believe that the correlation not only exists but is strong.” Eg. changes in GDP growth and stockmarket returns are not correlated and yet most people them to be.
–   Rosy prospection and introspection: “Anticipating that something in the future is going to be better than it actually will be, and remembering that event as being better than it actually was. Basically you love all states of time except the present, which never feels better than “just OK.”” So why does this happen? Why do we suffer from this? “Say you anticipate a beach vacation. Imagining yourself laying on the beach in the sun sounds nice. Then you get to the beach and all the umbrellas are taken, you get sunscreen in your eyes, and you step on a piece of coral. After you get home you remember the trip as being wonderful. Why? Partly because the sunscreen is now out of your eyes, and partly because you spent $10,000 on a beach vacation and it hurts to remember it as anything but nice.”
–    Levelling and sharpening effects: “Memories of certain parts of an event are retold and sharpened in your mind because they make sense to you, while other parts of an event are kept out because they don’t fit one of your existing mental models, leveling their importance. So memory of big events can become distorted over time, giving more weight to some details – particularly the parts that make good, easy stories – while other details become forgotten and filled in with bits of the sharpened memory. The sharpened memories can take on a life of their own, morphing into false memories as the whole story has to be contorted…”
–   Choice supportive errors: “Thinking the outcome of a decision you made is better than it actually was, and downplaying the performance of the option you decided against. A cousin of this is misremembering how and why you did something in a way that justifies your past decisions.” The best example of this in in the Indian market is Eicher Motors. Most people who bought Eicher before the Royal Enfield recovery began bought it because of the Volvo-Eicher JV. In retrospect, few remember that that is why the purchased this multibagger.

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