I was having a great back and forth conversation with Dividend Growth Investor (DGI) on the recent article on temperament. We went from the comment section into long and detailed emails on our position surrounding investors’ temperament and our opinions on why or why not the “average” investor might be fairly terrible investors, from a total returns perspective. Half way through the tome of an email reply I had written back, I started getting into the basics of the brain. When gathering mental models, it’s not enough just to read and understand finance, business, and accounting – ultimately, you need to have a base level understanding of all the major ideas in every field, from biology and physics to psychology and anthropology. The amygdala hijack – term coined by Daniel Goleman in his book Emotional Intelligence – is a blend of ideas arising out of biology, neuroscience, and psychology. For me, the concept of the amygdala hijack really illuminates why investors might typically buy high and sell low, leading to abysmal returns.
When it comes to investing, the adage that temperament trumps raw intelligence is most definitely true. Behavioral economics dispels the dated notion that all investors are cold, logical, rational actors seeking to maximize investment gains. In theory, we might all believe we are cold, logical, rational actors seeking to maximize investment gains. But in reality, theory – especially those surrounding the social sciences – often does not play out so neatly. I first began learning about finance 4 years ago. That continues to this day and will likely never stop. I first started actively acquiring fractional shares of attractive businesses 2 years ago, with the process accelerating a year ago as the student loans got paid off. Here are some thoughts on temperament I’ve gleaned over the years.
Imagine: it’s early Saturday morning; you’re snooze-forever exhausted after intensively exercising for 3 days in a row during the weekday; you need to go stomp out 32 km. Ouch. The good news is you don’t need to run 32 km! But we do. But that isn’t until mid-September when the Saturday training runs get to its zenith. Marathon training has descended upon us. The first week of training is done, with 4 runs in the bag totalling a distance of 24 km… about that one training run in mid-September. I’ve been reading Influence by Robert Cialdini. It’s great. I can see where Charlie Munger picked up many of his mental models in psychology through Cialdini. I’m going to experiment with the mental models of commitment and consistency bias to ritualize behaviour throughout our marathon training in order to hammer home habit formation through ritualization, which hopefully will make the long Saturday morning runs easier to tackle.
Too often in life, I come across crippling cases of people thinking in very simple terms, going through life auto-piloted to first level thinking. Howard Marks, the legendary junk bond investor, talks about first level thinking and second level thinking in his book The Most Important Thing: Uncommon Sense for the Thoughtful Investor. Too many people seem to lack the mental models necessary to interpret reality. Wait. Let me back up: what are mental models? I tend to get in the habit of reading benders, getting totally intoxicated and consumed with binging on my neverending pile of books, reports, and articles. Coming back from the 2015 Berkshire Hathaway annual meeting, I finally got my hands on Poor Charlie’s Almanack and a few other Munger books (Seeking Wisdom and Damn Right). While not the originator of any of the 100 or so major ideas spanning multiple disciplines, Charlie Munger synthesized the importance of a multi-discipline approach to life by becoming fluent in these major ideas, or mental models, and hanging these mental models in a latticework in his mind in order to avoid the man with a hammer syndrome. What is the man with a hammer syndrome?