Everyone makes mistakes when investing. We learn from our mistakes from the moment we are born.
By recognizing when we make investment mistakes and making the necessary adjustments to our investing discipline, investors must learn from them.
Do we recognize our investing error and learn from it when we lose money on an investment, or do we blame the market or bad luck instead? We must recognize our investing mistakes and then learn from them if we want to beat the market and make money from our investments. Unfortunately, it is much more difficult than it appears to learn from these investing mistakes.
You may have heard of this experiment at some point. It is an illustration of Antoine Bechara’s failure to learn from investing mistakes during a straightforward game. $20 was given to each player. Each round of the game necessitated a decision from them: either invest $1 or not. The project moved on to the next stage if the decision was not to invest. Players would give the experimenter one dollar if they decided to invest. After that, the experimenter would flip a coin in front of the players. The player lost the dollar if the result was heads. The player’s account was credited with $2.50 if the outcome came out tails up. After that, the task would move on to the next round. 20 rounds were played all together.
There was no evidence of learning during the game in this study. The percentage of players who chose to continue the game decreased to just over half as it went on. Players would have realized that it was best to invest in every round if they had learned over time. However, as the game progressed, a decreasing number of players decided to invest. In fact, they were getting worse with each round. They assumed they had made an investment error when they lost and decided not to play again.
So, how do we correct our investing errors? What strategies can we employ to overcome our “bad” behavior and improve our investment skills? We simply don’t recognize our own mistakes or those of others as such, which is the main reason we don’t learn from them. We have a variety of mental mechanisms in place to shield us from the terrible reality that we frequently commit errors. When we experience a loss, like in the previous experiment, we also become reluctant to invest. Let’s take a look at some of the investing mistakes we need to avoid.
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