I ran across an interesting bit of research today suggesting that one of the leading ways investors get suckered into investment bubbles, and subsequently decimate our annual performance, is that we are far too concerned with being left out of the money making process, rather than losing our original investment.
As one trading coach summed it up:
The prospect of regret [from not making money] is actually shown to be more motivating than the prospect of making money. So how that plays itself out is: well, my neighbor is in Google. I’m not making the money. I got to jump into Google now!
That’s the fear you’ve got to be on the biggest lookout for because that’s the one that will get you into bubbles at the worst possible moment.
– Denise Shull, CEO, The Rethink Group & Trader Psyches
[Fast forward to 2:20 minute mark]
This adds more fuel to the belief that there is still a largely unrecognized Behavior Gap among many investors in what we believe in our self deluded, confirmation bias clouded minds versus the actual rate of return we see on our quarterly balance sheets.
But what I find so intriguing is that this also lends more proof to the theory that our brains are programmed to follow the herd, and the real money makers are the iconoclastic personalities that can ignore the peer pressure, and/or make the investments that no one wants to make (e.g. take the path less traveled).
As Shull points out, it’s the regret of not making money that influences many of our poor investment decisions. But it’s also extremely difficult to ignore the desire to compete, or to make investing into some sort of competition — whether real in the case of professional money managers or a childish competition between neighbors — that may push you into bad investments that you might otherwise avoid.
For example, if the belief that your neighbor who already owns Google, might socially embarrass you by stating that he made a killing in Google while you’re the investing equivalent of Driving Miss Daisy, is so powerful that it would override your common sense not to buy, then you’re caving to the regret or fear of missing out.
In essence, the shortsighted belief that you may not be able to participate in the fun or celebration (e.g. making money) outweighs the fact that you may get punished later (e.g. losing money).
Sounds rather like high school… doesn’t it?
Like the time you knew it was a bad idea to ditch school, like all of your other friends, but you did it anyway because of peer pressure? Worse yet, to get the attention of a certain someone? Sounded good at the time, right? But man, did you regret it later.
That’s precisely what I find so astounding about the herding mentality and the efficacy of social leverage! You already know the herd is behaving irrationally. Yet, you’re willing to succumb to peer pressure, follow along with the herd to relieve that peer pressure, and accept that if you get hurt, at least everyone else will suffer the same fate as you.
Maybe I’ve just seen too many investment bubbles in my 15 years of investing, or maybe I’m too antisocial to care about being part of the cool crowd, but nothing turns me off more about an investment (or anything else for that matter) is to find out that everyone else wants it or already owns it.
So from my point of view, the best ways to shield yourself from this “fear of being left out” phenomenon are:
In the end, I don’t think it’s feasible to suggest that one person, unless you’re some kind emotionless robot, can ignore their emotions every hour of every day. Perhaps the best thing to do is to realize that you’re human, acknowledge that you’re going to make the occasional mistake, but simultaneously do all that you can to minimize outside influences when it comes to your money management decisions.