One of my favorite Seinfeld standup routines compared “Morning Jerry” or “Nighttime Jerry.” Well-rested Morning Jerry was rational and responsible; he made decisions that benefitted himself in the long term. Nighttime Jerry, on the other hand, was drained of willpower after a long day. That version of Jerry made impulsive decisions that led to immediate gratification (almost always with negative future ramifications). These were things like staying up late rewatching Caddyshack instead of getting a good night’s sleep (I can’t totally blame him there because Caddyshack is a masterpiece, but sleep is ultimately more important). If you can believe it, this skit reminds me of behavioral biases in investing (namely that while investors obviously care about long-term returns, they sometimes get worn down and can make decisions to satisfy their short-term impulses).
At CDI, we construct our portfolios in Morning Investor mode… we’re rational, thoughtful individuals with optimal risk/reward and balance in mind. Then, things start happening. Some of our stocks go up, some go down. CNBC reminds us of the top performing investments that we missed out on (e.g. meme stocks, Bitcoin, or speculative AI stocks). We get worn down, our willpower gets depleted, and the Nighttime Investor shows up. He has behavioral biases and starts coaxing us to override our plan.
We all have different behavioral biases to which we are most susceptible (things like anchoring bias, mental accounting, or overconfidence). For me personally, my most acute behavioral bias is avoiding action that could cause regret. If a stock declines due to fundamental deterioration, I hesitate to sell for fear of waking up one morning to the news that the stock has been acquired.
Errors of omission are less painful than errors of commission (i.e. bad outcomes caused by inaction are easier to handle than bad outcomes caused by an action). The classic trolley problem has similarities with this phenomenon.
In the trolley problem, there is a runaway train on course to collide with five people. You’re standing at the switch and can divert the trolley to another track that only hits one person. If you pull the lever, you save four people… but you also play an active role in the death of another person. Logically, pulling the lever is the right thing to do, but emotionally our active role in “killing” an individual makes the decision way more difficult. In investing, this is how I feel when I’m considering selling an investment mistake… it may be the logical thing to do, but it’s emotionally difficult for me.
My New Year’s resolution is to be a bit more Morning Investor, a little less Nighttime Investor. Overcoming psychological biases is easy in theory, hard in practice. I’m going to work on building some habits that might make it easier for me (like making decisions in the morning when I’m more rested and/or sleeping on a decision overnight to avoid impulsive actions).
Everyone’s go-to behavioral biases are different. Do your best. Get some sleep and make good choices in the new year.
IMPORTANT DISCLOSURES
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