Stories | May 11, 2010

Do you suffer from “selective thinking”?

Not all memories are equal - and this "thinking trap" can end up costing investors

Investors can end up selectively viewing data to see what they want to see, warns a list of 10 thinking traps.

The list - broken into part one and part two on the Litemind blog - carries important reminders for investors about checking facts and data, rather than relying on making decisions based on instinct or preconceived ideas.

I'll do what you're doing
The conformity trap - or going with the "herd" - is well known among the likes of share market investors. It was addressed in ING Group chief economist Mark Cliffe's Lesson 5 from the financial crisis video, in which he argued "the market isn't always right". Cliffe said the emotions of optimism and fear and greed can drive asset prices -- with this behaviour during the financial crisis leading to "many bargains to be snapped up by expert investors".

Anchoring, recall and sunk costs
The full list of 10 "thinking traps" includes:

  • The Anchoring Trap: (or over-relying on first thoughts) is when a first impression or estimate puts a heavy bias on what happens later
  • The Status Quo Trap: (or keeping on keeping on) is when current circumstances are automatically favoured over every other alternative
  • The Sunk Cost Trap: (or protecting earlier choices) is when earlier choices, including mistakes, weigh too heavily on later decisions
  • The Confirmation Trap: (or seeing what you want to see) is the tendency to look for information that supports what you already think, at the expense of other views
  • The Incomplete Information Trap: (or review your assumptions) reminds us to look at hard facts rather than relying too often on preconceptions
  • The Conformity Trap: (or everybody else is doing it) details how "herd" instincts, or going with the group, can influence choices individuals make
  • The Illusion of Control Trap: (or shooting in the dark) refers to the inclination to underestimate random events in favour of a feeling of control
  • The Coincidence Trap: (or we suck at probabilities) says probabilities are "unintuitive" and gives the example of it taking a group of just 23 people "to make it more likely than not that two of them share the same birthday (day and month)".
  • The Recall Trap: (or not all memories are created equal) tells how remarkable experiences stand out and can have an exaggerated importance when people consider think about them later
  • The Superiority Trap: (or the average is above average) reveals people have an inflated view of their own skills and capabilities - which can lead to errors in judgement.
eZonomics team
.(JavaScript must be enabled to view this email address)