Investing Psychology Chapter 6 Part 2: Cognitive Repairs and Good Enough Decisions

We continue with Chapter 6 of Tim Richards’ Investing Psychology. In Part 1, we covered the early debiasing strategies. Now we get into the harder stuff: why we can’t let go, why we fall in love with stocks, and whether “good enough” is actually good enough.

Investing in the Rearview Mirror

Hindsight bias is basically unkillable. Richards says it straight: our tendency to believe we predicted the present is “virtually ineradicable.” And from hindsight comes overconfidence. Nothing hurts an investor more than believing they’re better at predicting the future than they actually are.

But here’s the thing. Some professionals do manage to stay relatively accurate. Weather forecasters, geologists, and accountants. What do they have in common? They get constant, unrelenting feedback about their predictions. They can’t hide from their errors. Every wrong forecast is right there, in front of everyone.

The lesson is simple. If you want to get better at investing, you need honest feedback. Track your calls. Write down your predictions. Compare them to reality. And if you can’t handle that kind of honesty? Richards says maybe you shouldn’t be investing for yourself.

Lesson from the book: If you can’t tolerate feedback on your investing results, stop investing for yourself. Good feedback improves performance faster and cheaper than experience alone.

Living with Uncertainty

We humans hate uncertainty. We always have. Richards points out that rather than accepting it, we invented volcano gods and trusted economists to predict the future. Neither works very well, but at least we have someone to blame.

Stock markets are pure uncertainty. And most of us have zero training for it. We live in a world designed to protect us from risk. We sue when things go wrong. We expect everything to be safe. Then we walk into the stock market, where a solid company can drop 20-30% in a year for no real reason, and we panic.

Richards uses a great example. Imagine if you could check your home’s value online every minute, and the price changed based on random bets from strangers, computer algorithms, and the occasional real sale. You’d go crazy. But that’s exactly what stock prices do. And because prices drop slightly more often than they rise, checking frequently means more disappointments than happy moments.

The fix? Turn off the portfolio tracker. Ignore business news. Don’t invest money you’ll need soon. Volatility is normal. Short-term noise is just that: noise.

Lesson from the book: Don’t track your stocks regularly. Ignore media noise. Never invest with money you might need in the short-term. Volatility will hit at the worst possible moment.

Sunk by the Titanic Effect

You’d think safety measures would make things safer. But sometimes they make things worse. Richards calls this the Titanic Effect.

The Titanic had 16 watertight compartments and could stay afloat with four flooded. No accident had ever opened more than four. So the crew relaxed. They felt safe. Then an iceberg opened five compartments and the ship went down.

The same thing happened in finance. Before the 2008 crash, banks handed risk management to computer models. Everyone relaxed. Goldman Sachs’ CFO called the crash a one-in-100,000-year event. Researchers pointed out that would be like winning the UK lottery more than 20 times in a row. The models said everything was fine. The models were wrong.

Here’s the problem: when we believe a safety system is protecting us, we stop paying attention. We get lazy. Richards says the best cure for the Titanic Effect is actually having regular small accidents. Sounds weird, but it keeps you alert. If everything goes perfectly for too long, you start thinking you’re unsinkable.

Lesson from the book: Never assume markets are safe or that any method is foolproof. Celebrate your errors and learn from them. The moment you think you’re safe is when you’re most at risk.

Changing Your Mind and the Sunk Cost Fallacy

Keynes supposedly said, “When the facts change, I change my mind.” Sounds easy. It’s not.

Once we commit to something, whether it’s a marriage, a war, or a stock purchase, we become terrible at admitting it was wrong. Researcher Barry Staw showed that negative outcomes actually make people invest more time, money, and effort into their failing decisions. It’s the sunk cost fallacy: “I’ve already put so much into this, I can’t quit now.”

The classic experiment by Arkes and Blumer showed that people who paid more for theater tickets were more likely to attend the show, even if they didn’t want to go. We hate wasting what we already spent, even when the rational move is to walk away.

Richards shares a useful framework from cross-cultural psychology for how to fight this:

1. Notice when something seems off. Don’t explain it away.
2. Ask what’s really going on. Try to disprove your theory, not confirm it.
3. Come up with alternative explanations.
4. Use all your knowledge, not just investing knowledge.
5. Don’t jump to conclusions. It’s okay to wait for more data.

Lesson from the book: Sunk cost fallacy and commitment bias will keep you holding a failing stock. Loss aversion makes it worse. Don’t ignore events that contradict your expectations. Always try to explain them.

Love Your Kids, Not Your Stocks

Here’s something investors don’t talk about enough: we fall in love with our stocks.

Research by Statman, Fisher, and Anginer found that people treat stocks they like as if they’re low risk. They’re not. In fact, unloved stocks tend to outperform loved ones.

It gets worse. Aspara and Tikkanen found that people will invest in a company with lower expected returns just because they like it. And if they feel the company shares their values? Even more likely to buy. We get an emotional reward from owning stocks we identify with, completely separate from the financial return.

Richards isn’t saying ethical investing is wrong. If you genuinely want to avoid certain industries, set your filters and go. But liking a company’s products or brand should not affect your investment decisions.

The glamour stocks with amazing products and great marketing often come with premium prices. That premium is the cost of the halo effect. Meanwhile, the unloved, boring, beaten-down stocks that nobody wants? Those are often where the real value sits.

Lesson from the book: The affect heuristic makes us invest in companies we like and pay premiums for positive halos. Stocks with negative affect tend to produce better returns. Love your family, not your portfolio.

Cognitive Repairs

So if all these biases are well understood, why can’t we just fix them? Richards is honest about it: there’s no single solution. Behavioral bias is built into how our brains work. You can’t just delete it.

But there’s a framework called Cognitive Repairs, developed by Heath, Larrick, and Klayman. The idea is not to eliminate biases but to build processes that repair the damage they cause.

Two examples. First, self-serving bias makes us prefer explanations that make us feel good. The fix? Have trusted people who force you to explain your results honestly. If you can’t explain what happened, you can’t repeat success or avoid repeating failure.

Second, availability bias means we only consider information that’s easy to recall. The fix? Build processes that force you to examine a wider range of data before making decisions.

The key is to focus on your own specific weaknesses. Don’t try to cover every bias. You’ll drown in rules. Start with the ones that hurt you the most.

Lesson from the book: Cognitive repair strategies accept that biases are inevitable but try to repair the damage. Build personal processes that target your biggest weaknesses.

Satisficing: Good Enough Is Good Enough

Richards ends the chapter with an interesting twist. Psychologist Gerd Gigerenzer argues that many behavioral finance findings are overblown. He says a lot of our “biases” are actually efficient shortcuts.

The concept is called satisficing, coined by Herb Simon. We don’t have the brain power to evaluate every possible option. So we find a solution that’s satisfactory and satisfying. Good enough. And Gigerenzer’s research suggests this approach often works surprisingly well. Sometimes, more data actually leads to worse decisions.

There’s also the problem of ecological validity. Most bias research happens in labs with artificial scenarios. Real life is different. Richards acknowledges this but argues that stock markets are essentially giant laboratories. So behavioral finance findings apply well to investing, even if they don’t always apply to the rest of life.

Lesson from the book: Our biases exist for good reasons and usually serve us well in everyday life. The trick is knowing when to trust your gut and when to slow down. With investing, it almost always pays to delay a decision and think it through.

The Seven Key Takeaways from Chapter 6

Richards wraps up with these points:

1. Focus on numbers, not feelings. Avoid big losses and decent gains will follow.
2. Value investing beats momentum. Stocks tend to revert to the mean. Buy against the herd with a margin of safety.
3. Short sellers do serious analysis. Don’t ignore their findings. And diversify your portfolio.
4. Build actual debiasing methods, not just gut feelings. A written guess at future earnings is better than no guess at all.
5. Feedback is essential. Track your results. Analyze them regularly.
6. Ignore media noise. No model will save you from your own biases. You have to do the work yourself.
7. You will never fully overcome bias. The moment you think you have, you’re in the most danger.

That last one is the big one. Bias isn’t a problem to solve. It’s a condition to manage. The work never ends.

Next: Chapter 7 - Good Enough Investing.

Previously: Chapter 6 Part 1 - Debiasing Strategies.