Why Do Bad Investments Happen to Smart People?


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Why you should never fear missing out

Smart people are often the most dangerous in terms of poor decision-making ability because they tend to be overconfident, make things too complex, and over-think things. The smarter you are, the better you are at constructing a narrative that supports your beliefs, rationalizing and framing the data to fit your argument or point of view.

In , psychologists Richard West, Russell Meserve, and Keith Stanovich tested the blind-spot bias—an irrationality where people are better at recognizing biased reasoning in others but are blind to bias in themselves.

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Overall, their work supported, across a variety of cognitive biases, that, yes, we all have a blind spot about recognizing our biases. The surprise is that blind-spot bias is greater the smarter you are. The researchers tested subjects for seven cognitive biases and found that cognitive ability did not attenuate the blind spot. Duke pointed to another study that showed IQ is positively correlated with the number of reasons people find to support their own side of an argument.

So being smarter makes it easier to fall prey to the confirmation bias.

And the research shows that intelligent people are more prone to the blind-spot bias. That struggle may be even more difficult for the smartest among us. Membership Login My Profile Register.

How to start investing in stocks: A step-by-step checklist

Equities Equities Home Stocks Quickrank. Company Site. Site Search Membership. Smart people can be bad investors. Ben Carlson notes that emotional intelligence has a much bigger impact on the success or failure of investors than their degrees or investment strategy.


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Dhruva Chatterji Mar 13 PM great article! Recent in Library Advisers, have you planned your succession? Recent from this Author Advisers, have you planned your succession? Nov 11 6 questions answered for NRIs interested in real estate Nov 07 Why a cashless claim may require you to pay Nov 06 4 investing lessons from the Yes Bank debacle Oct 25 Talk politics to your clients Oct All rights reserved.

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For example, their paper includes the chart below which shows how different individual investors entered and exited stocks during the DotCom bubble based on their IQ group [Note: You can assume Stanine 5 represents an average IQ of with Stanine 9 representing a high IQ of What you will notice is that the lowest IQ individuals Stanine entered positions green nearer the top of the DotCom bubble compared to their more intelligent counterparts Stanine 9 who were not entering red at the same time. As the paper goes on to state:. As the authors note, almost all of their conclusions are consistent with prior academic work in this field.

Therefore, if we know that IQ is correlated with income and income is correlated with the ability to invest , then high IQ individuals will, on average, have more experience investing. Finnish males.

So while it is clear that smarter people tend to be better investors, this may only be true to a point. Further research is needed.

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Smarter people knew to avoid huge trading costs and other fees, they knew to be wary of entering markets at extremely high valuations i. DotCom , and they knew about behavioral biases i. As Bill Gurley, the legendary VC, said in this incredible talk on career advice:. This is why, when it comes to personal investment decisions, knowledge is power.

Investors on Main Street are nowhere near as naive as the ‘smart money’ has long contended

So keep reading, keep learning, and keep studying the evidence. Thank you for reading! This is post Nick, another great posting! Also, I wonder how competitive sports experience influences investing results. Then, there are the more mental sports i.

Buffett plays bridge , Chess, etc. Excellent post. The researchers highlight many important points and it makes a lot of sense that people with higher income get more experience investing and are less prone to fear loss and chase profits. Also, it would not surprise me if intelligent people get more exposure to new trends and technologies through their work and professional networks.

Why Do Bad Investments Happen to Smart People? Why Do Bad Investments Happen to Smart People?
Why Do Bad Investments Happen to Smart People? Why Do Bad Investments Happen to Smart People?
Why Do Bad Investments Happen to Smart People? Why Do Bad Investments Happen to Smart People?
Why Do Bad Investments Happen to Smart People? Why Do Bad Investments Happen to Smart People?
Why Do Bad Investments Happen to Smart People? Why Do Bad Investments Happen to Smart People?
Why Do Bad Investments Happen to Smart People? Why Do Bad Investments Happen to Smart People?

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