The inner monkey: our dangerous, in-built psychological biases
Chapter 6 of "Getting a Better Class of Enemy", my investment book
I'm writing an investment book called "Getting a Better Class of Enemy - Money, Markets and Manias". As I write the chapters, they will be made available to paid subscribers to OfWealth. Previous chapters, along with the Preface and Chapter Plan, can be found by clicking on this link.
In case you missed the previous chapter, which was published on 27 February, you can find it here(or in your unread emails).
This latest chapter deals with our in-built psychological biases, which result from the way we evolved in the wild. Unfortunately, they are often badly suited for the modern world, and especially for the arena of investing.
There's a whole field of study dedicated to this area, known as Behavioural Finance. This chapter is a summary of some of the main issues we face, but can't cover every detail. You may wish to read further on the subject.
What's more, I share some techniques that I use personally to try to overcome our destructive in-built biases. They help me a lot, and should help you too.
It's a shortish chapter. But that should not detract from its importance. Forewarned is forearmed, as they say. Knowing how you could subconsciously trip yourself up in markets is essential.
Put another way, you can and should make conscious decisions to override the hard-wired biases, or at least try.
This time around, as a one-off, I’ve given free subscribers access to the chapter’s introduction, but only paid subscribers can access the meat in the pie.
As always, feedback from readers is encouraged.
Please send emails to ofwealth@substack.com
Chapter 6:
The inner monkey: our dangerous, in-built psychological biases
"We are just an advanced breed of monkeys on a minor planet of an average star. But we can understand the Universe. That makes us something very special."
Professor Stephen Hawking (1942-2018), theoretical physicist and cosmologist at the University of Cambridge
What would you do if you bumped into a tiger in the jungle? The chances are you’d panic, run, and climb the nearest tree.
That flight instinct would probably be a sensible move, if not guaranteed to save your skin. Assuming that you were unarmed, it would certainly be better than trying to pick a fight with a big, striped, hungry carnivore that possesses large fangs and claws.
Fight or flight? In this instance of a required snap decision, flight would be the clear winner.
Powerful emotions such as fear affect us all. That’s because, underneath our veneer of technological progress, we’re still just animals. We have an "inner monkey".
Of course, we're animals with big brains and opposable thumbs. But we're still subject to strong emotions as well as deep-seated, and often subconscious, behavioural biases. Both evolved over many millennia, because they were the traits that improved our chances of thriving and surviving in the natural world.
It's worth considering the following...
The Universe is around 13.8 billion years old.
The Earth is about 4.5 billion years old.
Life on Earth got started about 3.5 billion years ago.
The first mammals appeared around 210 million years ago.
Our first human ancestors are believed to have existed around four to five million years ago.
Homo Sapiens - that's us, from the Latin for "wise man" - dates back around 300 to 500 thousand years.
The First Industrial Revolution started around 1760, less than three centuries ago, and only around ten generations ago.
The London Stock Exchange was founded in 1801, and the New York Stock exchange in 1817 (although both cities had earlier, less formal markets).
The British Broadcasting Corporation (BBC) started the first regular television broadcasts in 1930. Although it wasn't until many decades later - perhaps the 1970s - that most homes had a TV set.
In 1969, the concept of the internet was born, although it took until at least the late 1990s before it started to become widely available to the public, in developed countries.
(It's interesting to note that by 2020, around 40% of the world's population still had no internet access. Which means that billions of people are still deprived of the joys of 24-hour news flow, social media, or online brokerage accounts. What's more, many of the lucky 60% only have occasional access. The official definition of "having" internet access means just once per month or more. The internet really still is a new and growing phenomenon.)
In 1995, the first online brokerage account was launched, and online brokers expanded rapidly in the late 1990s and since.
In short, as mammals we've had a couple of hundred million years to evolve and adapt to wild environments. But it's only been a few decades since we've been able to view current market prices and trade shares via our computers, or smart phones.
Put bluntly, we have achieved a great deal of economic progress over the past couple of hundred years, as capitalism has steadily chipped away at poverty and raised living standards (albeit imperfectly at times). But, as individual humans, we're still left poorly adapted to cope with modern investment markets and the constant flow of price ticks, news reports and analyst opinions.
Instead, we remain highly tuned to pick a fight or to run away from danger in the physical world.
In financial markets, in broad terms, this translates into the powerful forces of greed and fear. At times, many investors get far too greedy and forget to pay enough attention to risks. At other times, people get too fearful and miss out on substantial profit opportunities.
None of this means that we can't still be successful investors. But you will significantly improve your chances of long-term success if you're aware of your in-built biases, and can keep a lid on emotions when needed.
So let’s take a look at what those destructive biases are, and then some ways to try to tame them.