Having covered Sin 1: Lust in the previous article, I will be covering on Pride in today’s article.
Sin 2: Pride – Being Overconfident
Everyone possesses an egoistical side, that need for face. Males more so than females. There are always moments in our life where we are blinded by our own pride/overconfidence. This could be us thinking that since we are working in a certain industry, we somehow become experts in it or years of successful investment returns resulting in us thinking we are investment professionals. At times, just by owning a good, that sense of ownership results in pride and resulting in wrong decisions made.
Having started investing since 2011, I would say every year has been a pretty decent year. As someone new to investing and achieving double digit returns for a few years it is something that would easily get to our heads. It is moments like this where we tend to forget that a rising tide lifts all boats. Markets were all performing well, hence it was natural that my stock picks would benefit from this exuberance. I would admit that I still believe that some part of that investment performance was a result of my skill, but that could just be my pride talking.
In behavioural economics, researchers gave a group of volunteers a coffee mug and asked them to write down their lowest selling price for it. Other volunteers were asked to write down the highest price they’d pay for the mug. Because both groups were chosen at random, one would expect that most trades would match off. Buyers and sellers should be able to value the mug equally. However, very little trade took place because sellers priced the mugs at $5.75 on average, and buyers at $2.25.
In investing, this so-called endowment effect leads us to value our own investments more highly than the market does. Some who fall prey to it hold on to securities too long and don’t sell when the market is telling them to bail or to seek new and better opportunities. With regards to the goods we own, we value them more as compared to when our roles are reversed. We will always wish to sell them higher than what we are willing to buy them for.
One interesting theory I have is that people with excessive amounts of pride believes in independent thinking. Rarely they shun from piggybacking ideas from other investors but rather form their own investment thesis. While there is nothing wrong with that if our strength lies in forming original and successful investment ideas. For example, I would often cross reference companies that I deem cheap with investors/funds that are stronger in terms of the qualitative aspect of investing. Often, I find that there is no shame “copying” ideas, as long as we understand the thesis behind it.