Investing Psychology Chapter 1: Why Your Senses Lie to You (Part 1)
Wandering around the average investor’s mind is like taking a tour of Wonderland with the White Rabbit. Most of what we think is true is actually false.
In the first part of Chapter 1, Tim Richards shows us that our senses—the very things that keep us alive—are often the things that keep us from getting rich.
The Bias Blind Spot
Here’s the thing: it’s easy to see when other people are biased. It’s almost impossible to see it in ourselves. We think we’re better judges of the world than everyone else.
Think of the Müller-Lyer illusion (those two lines that look different lengths but are actually the same). Even when you know the trick, your eyes still lie to you. Investing is the same. You can’t just “will” yourself to be unbiased. You have to accept that your brain is going to glitch and then build systems to handle it.
Seeing Patterns Everywhere
Our brains love patterns. It’s why we see a face in the moon or “Mother Teresa” in a piece of toast. This is called pareidolia.
In the stock market, this is dangerous. We look at a chart and see a “trend” where there’s just random noise. We try to fit the facts to our preconceptions instead of looking at the data.
The Pigeon Problem
Psychologist B.F. Skinner once put hungry pigeons in a cage and gave them food at random intervals. The pigeons started doing weird dances—bobbing their heads or spinning in circles—because they thought their actions caused the food to appear.
We do the same thing. If we buy a stock while wearing our “lucky” socks and the stock goes up, we think the socks mattered. This is called reinforcement. Markets are great at giving us just enough “wins” to keep our superstitions alive.
The Super Bowl and Horoscopes
Did you know the winner of the Super Bowl used to be a great “predictor” of the stock market? It’s a total coincidence, but for years, people took it seriously.
We also fall for the Barnum effect—the same trick horoscopes use. We read vague “expert” analysis and think, “Wow, this describes my situation perfectly!” In reality, it’s so vague it could apply to anyone.
The Lesson So Far
Don’t trust your gut. Your gut was designed to help you avoid mammoths, not to pick the next big tech stock.
In the next post, we’ll look at why we try to control things we can’t and why we follow the herd like a bunch of confused cattle.