Investing Psychology Chapter 3: Noise, News, and Networks (Part 2)
Continuing with Chapter 3 of “Investing Psychology.” We’re looking at all the weird external stuff that influences our money.
The Benefit of Growing Old
Experience actually helps with some biases. Research shows that older investors are less prone to the disposition effect (selling winners and holding losers).
Why? Maybe because the ones who don’t learn eventually go broke and stop investing. The survivors have learned to diversify and stay calm. If you want to skip the “going broke” part, start learning from other people’s mistakes now.
Social Networks are Echo Chambers
We tend to hang out with people who agree with us. On bulletin boards or investment clubs, everyone brags about their wins and hides their losses.
This creates persuasion bias. If you hear the same “buy” tip from five different people, you think it’s five independent opinions. In reality, it might just be one guy’s post being repeated five times.
SAD Investors and the Weather
Believe it or not, the amount of sunlight affects the stock market. People with Seasonally Affective Disorder (SAD) get depressed in the winter and become more risk-averse.
This leads to a “seasonal shift” where money moves into safe government bonds in the fall and back into stocks in the spring. It has nothing to do with the companies and everything to do with how much Vitamin D the investors are getting.
The Bangladeshi Butter Fallacy
Statisticians once found a 99% correlation between the S&P 500 and butter production in Bangladesh. Does that mean you should track dairy exports to trade stocks? Of course not.
This is data mining. If you look at enough data, you’ll find random patterns that look like they matter. This is why “Twitter sentiment” models often fail. They find a temporary pattern that disappears as soon as everyone tries to trade it.
The Fallacy of Composition
Imagine a crowded theater. If one person shouts “Fire!” and runs, they might get out. If everyone runs at once, they get stuck in the door and everyone loses.
This is the fallacy of composition. What’s good for one person (selling during a crash) is bad when everyone does it at once. This is why you should never borrow money to invest. If the “fire” starts, the bank will force you to run for the exit at the worst possible time.
7 Key Takeaways from Chapter 3
- Don’t confuse situation with disposition. Are you smart, or just lucky?
- Beware the halo effect. Shiny logos don’t mean good returns.
- Social media is noise. Most “tips” are just echoes.
- Environment matters. Don’t trade while you’re depressed or in a “winter funk.”
- Anomalies vanish. As soon as a “secret” becomes public, it stops working.
- You can’t beat the machines. Don’t try to out-trade a supercomputer in the short term.
- Think long-term. Your only edge is time. Use it.
In Chapter 4, we’ll dive into Social Finance and why your neighbors’ new car is making you poor.